How to get this commercial leased

24 Replies

I bought a medical office space in Houston, close to University of Houston in 4/2017. I hired a realtor to list it on loopnet. I have called a few organizations to see if they may be interested. I have had no luck so far. My realtor keeps telling me that it's normal for commercials to sit on the market. I created a listing on craigslist on my own and have been renewing it weekly for the last month. What else can I do to make my own luck? 

Also list for free on Xceligence? www.commercialsearch.com Check zoning and brainstorm all possible uses for space. 

Who were the last tenants? industry, generalist vs. specialty? Are there existing tenants? ask them what would be a complementary service. Podiatry, back and spine, etc.

"I hired a realtor to list it on loopnet." Is this a retail or office specialist tenant leasing broker?

If not putting on Loopnet really doesn't do much at all. You need a tenant leasing broker that has the relationships to get your property in front of the potential tenants.

The tenant rep brokers spend many months or years working with tenants planning the next move to a space or location like I would spend a bunch of time selling a property.

I realize the best use of my time as a developer is to let someone else do what they are best at.

Numbers never lie so the way to make money in real estate is BEFORE you buy. If you don't see it then, you won't see it after you close.  Learn to put lease clauses (building must have x% leased prior to closing = and that x% is what I underwrite with or without debt service) in your Purchase & Sale Agreements (PSAs). This mechanism facilitates your seller and the agents on both sides (they make more money too) to find tenants and also justifies the acquisition price.  A contingency for a feasibility study should also be in your PSAs. This provides inventory and 'what's missing/needed' in the market . You can see what businesses are moving more than others and cyclical patterns but most important: obtain rent per sq. ft. data so the proforma is based on valid data.  My sense is if you did the aforementioned, you wouldn't be vacant for 6 months.
As for now, do the feasibility study and determine the inventory and 'what's missing/needed' in the market. Price your building aggressively (lower than other offerings) and make it up down the road with escalations.  Feel free to contact me Bharath, we're all learning so it's all good.

Loopnet is near as close to useless, its a free service that is pretty much only utilized by smaller self-performing tenants or owners. Hopefully, at a minimum, your broker is also using commercially established MLS's such as Xceligent or CoStar (which is where the tenant rep brokers mentioned by @Joel Owens are going to be looking).

Thank you all your helpful responses. 

@Michelle L. This is a unrestricted use property. 

@Joel Owens @Taylor Hazard I made the mistake of coercing my residential realtor into commercial, just because she helped us a lot with making our residential purchases. She didn't really want to do it. I will have a conversation with her about posting the listing on Xceligent and CoStar today. Is it reasonable to have a 2 month deadline to get this leased, before transitioning to a more specialized broker. I found a list of the largest commercial brokerages here https://www.bizjournals.com/houston/subscriber-onl...

Can I just call them and ask them for a broker who would be the best fit?

@Kevin Keithley When I bought the building, my intent was to owner occupy. However, my other location has become too busy for me to start another one at this time. The numbers looked good for the buy, from that perspective. 

The current tenants in the medical complex are a OBGyn physician, a dentist, a pharmacy, & a consultant (works with non profits to improve employment and provide skills training). 

@Ronald Rohde The former anchor tenant was a large pediatric practice. My building has a nurse practitioner occupying 30% of the building. I would like to see a physical therapist, dialysis unit or a primary care physician become my next tenant. 

Medical office tenant rep broker.

Check with SIOR.com 

"I will have a conversation with her about posting the listing on Xceligent and CoStar today" 

These are both very expensive subscriptions, I think our office pays an annual fee of $50,000 + additional fees for each broker on the system.... Just for CoStar... So again, your best suited to find a commercial broker who specializes in that product type. 

"I found a list of the largest commercial brokerages here https://www.bizjournals.com/houston/subscriber-onl.... Can I just call them and ask them for a broker who would be the best fit?"

Two suggestions: Yes you could call the 3-4 largest commercial brokerage shops and ask for the managing director, and then tell him/her about your property and who would be best suited for the assignment

OR

If you give me the address and square footage I can introduce you to one of my colleagues in our  (Cushman & Wakefield) Houston office that I know will be well suited to the project. 

To clarify @Joel Owens point above you need an office LANDLORD broker. Office tenant rep brokers only deal with tenants. 

Originally posted by :

Thank you all your helpful responses. 

@Ronald Rohde The former anchor tenant was a large pediatric practice. My building has a nurse practitioner occupying 30% of the building. I would like to see a physical therapist, dialysis unit or a primary care physician become my next tenant. 

 Its not the tenant/use that you want, its what a new tenant wants. The existing tenants surely have referrals both to and from, those are the people who want to be in your space. 

@Taylor Hazard . I will take the referral. My building is 5100 sq ft, but it has 3600 sq ft of vacant space to lease. Thank you

3600 sq ft of space is small for a managing director typically to take on. They might pass it on to their associate agents to work on. Anything comes of it the managing broker makes a cut etc.

What is your NNN per sq ft? Is lowering price acceptable to get the traffic? Is there a sign at site. In our area MLS can list business lease and that gets syndicated to every rental site as well.

I have a update. I got a new commercial real estate broker. I can already appreciate the specialization he has been bringing in. I spent $2400 to paint the walls, replace ceiling tiles, patch up dry wall issues,& painted the entry door. We had a professional take pictures and will soon list online. I am feeling good about this. I hope this translates into some action. 

Bharath Raj: Did you have any luck about the new hired commercial real estate broker? Who did you decide to hire? I have a small medical office (1242 sqft) in Angleton, Tx. I just listed my property on MLS and LoopNet. I am not sure should I hire commercial real estate broker or it is ok to use residential agent since my property is small.

@Khanh Tran I have not leased it yet. It's not yet listed on loopnet. I am using Justin Clark from "Clark Gaines". I will keep you updated on how it goes. I do feel like I have a better shot this time, but who knows. 

@Bharath Raj : Any luck with your medical office? Did the new listing agent able to lease out your medical office yet?


Just so you know, its FREE to list on Co-Star and I believe they will list on Loopnet also.  I've dealt with small spaces like this before and most brokers will not spend much time on it since their reward is minimal.  I manage all of my own properties and do it full time.  In my experience, I have always done a better job than a broker, especially with sub $1m properties.  

Like everyone else stated, Loopnet isn't much help but I would still list on there.  Use your existing tenants to help you find a tenant and just pound the pavement.  Be relentless, try to steal tenants from other properties etc.    

@Khanh Tran I have had one showing for a medical group, but nothing sealed yet. Strangely, I had my agent ask me if I wanted to sell it. I told him that my focus was to lease it out. 

@Ash Patel The property is listed on loopnet. I am thinking of self managing too, but I wonder if it will take too much of my time. 

As a consolation, the adjacent building was leased to a chain of Autism treatment centers. So, my building is the only inventory left for medical space in this part of town. That makes me optimistic. If it won't lease within the next 4 months, I will just owner occupy and open up a 2nd location for my own business. That' my exit strategy. 

Bharath,

They might be asking that question because buyers are searching for value add deals to lease up that are investors. it would depend on the price. If you could make a quick gain and 1031 exchange after resale costs it might make sense.

The other reason the broker could be asking is an end user that wants to occupy the remaining empty space but wants to OWN the whole building. They might get an SBA loan on it etc.

If you do not want to sell to an end user or an investor then you likely have to wait to lease it out. It can take awhile the LOI and lease negotiations. Tenants do not take moves lightly especially for larger spaces. You want it leased today for income with the best tenant you can find. The tenant wants to be slow and methodical in their business relocation of an existing business or expansion growth plans.

Generally the only time a tenant will accelerate time line is if the location is superior to anything else out there they are looking at and many tenants are competing for it.

Since you are in a major market there are specialized brokers who focus on medical office.  This is what I would do: 

1. Search CoStar/LoopNet for Medical Office Lease Listings and aggregate a list of brokers who have "medical office" listings in your particular sub-market. 

2. Interview only medical office brokers who have a substantial portion of their business from medical office. The more specialized in medical office the better.  The idea is to find out who is "actively speaking to requirements"... not just "running a survey of listings". 

3. During interviews with firms request that a Jr. broker be placed as lead broker.  

4. Ask for a "market" brokerage fee schedule. (Probably 4% of gross to tenant rep and 2% gross to agency broker).

5. Add a $2 per square foot broker bonus to the listing broker and a $2 per square foot broker bonus to a tenant rep broker. 

The reality is no one is motivated to work on a 3,100 sf lease deal in a major market and the people who "seem" interested are only interested because they do no have enough business to focus on (I presume).  You need to incentivize the brokerage community to a) work on your deal b) bring you a tenant c) focus until the deal is completed. If NO ONE is offering a bonus in the Houston Medical Office market the BETTER. 

I offered additional $/sq ft, and now I have a offer from a physician to lease the whole space (1700 sq ft is built out by prior physician tenant, 1900 sq ft is shell space). The tenant rep is asking for the landlord to pay for all electrical, HVAC, ceiling, walls and plumbing. They want to provide us a design, which means I may have to knock down walls from the part where it' already built out. Tenant is willing to sign a 5 year lease & pay for finishes (flooring, sinks, etc). Tenant has roots in this part of town and had to move due to unfortunate events (plumbing issues + mold). When I was looking up how much it would cost me to handle the tenant' requests, I found random numbers ($50/sq ft for shell space without finishes, $25/sq ft for previously built out space). How would y'all recommend negotiating the build out and lease (NNN lease)? Should I engage a real estate attorney at this stage to draft a lease?

Yes retail commercial attorney. If they want you to front the cost of most TI and it can be expensive with medical then you want longer than 5 year primary lease. At least 10 years with personal guarantee not just corporation or single unit LLC.

Make sure rental increases happen each year instead of a 5 year block etc. 

We are still negotiating, but it seems to be heading in the right direction. What would be the best way to finance the landlord portion of the build out, from a tax perspective? I am hesitant to use my own cash. Is there a rule of thumb amount that I need to hold in my reserve? 

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