Why the Commercial Real Estate Collapse Could Be a Good Thing

Your business may be able to negotiate a lower rent.

By jonathan.weber

The great residential real estate bust has been an unmitigated disaster for most types of small businesses. Retailers have suffered as consumers adjust to the loss of housing equity. Contractors, real estate agents, interior designers, architects, and insurance agents, to name just a few, have all seen their work dry up. Entrepreneurs who financed their businesses with home-equity loans, or planned to do so, are sweating it out.


For some time, economists have expected that the next shoe to drop is commercial real estate – but in this case, there is some potential upside for small companies. Rent is usually one of a firm’s highest fixed costs, and many of us may now get the opportunity to negotiate a much better deal.

There’s plenty of evidence that the same forces—namely, easy credit—that led to the residential real estate bubble also fed significant overbuilding in commercial real estate. In many parts of the country, there are now simply more suburban office parks, malls, and expensive downtown high-rises than the market can absorb.

The financiers, in many cases, have not officially recognized this, which is why you haven’t read that much about it in the financial pages. But if, as economists such as Chris Thornberg of Beacon Economics predict, the day of reckoning is nigh, this is an excellent time to get a better deal on your space.

If you’re locked into a long-term lease, there may not be much you can do. But if you’re not, and there’s no huge reason that you can’t move, I’d suggest making a few calls to find out what comparable space is renting for. You might also try to suss out whether your building and perhaps other buildings owned by the same landlord are having vacancy issues.

Then hit up your landlord for a rent reduction. You probably want to decide beforehand whether you’re willing to back up a threat to actually move out—you’ll obviously be in a much better negotiating position if you are—but either way, there’s no harm in having the conversation.

On the flip side, I’d be hesitant to sign a long-term lease in the current environment, unless it’s at a very substantial markdown to recent rental rates. I’d also stay away from any rent or purchase deal in which I might be counting on leasing or subleasing space to other tenants. While it might seem like there are bargains out there already, remember that commercial real estate did not begin to decline until after the residential market crashed, and any recovery in prices is likely to be three or four years off.

Rent aside, you might also want to figure commercial real estate market conditions into any kind of location or relocation decision. In general, residential real estate has taken the biggest hit on the suburban/exurban fringe —new developments that are far away from city centers and services. The same will likely hold true for commercial; that shiny new strip mall in the middle of nowhere may not be attracting many patrons for a long, long time.

I’m a big believer in the benefits of downtown locations for small businesses, anyway, and I think the current economy will make those benefits even more pronounced.

None of this will be any comfort to companies that depend on commercial real estate construction or management for a living. Nor will it mean much one way or another for firms that own their own buildings (unless you were planning to sell it). But for the rest of us, it could be one of the few silver linings in an economic outlook that remains quite gloomy.