"Nonprofits are counter-cyclical, so when pricing begins to go down, they start to look at ways that they might capitalize on lowering their expenses," Sunshine tells GlobeSt.com. "We surveyed about 200 nonprofits, and nearly all said their current donor/funding levels had either moderately or significantly slowed. The reason they would try to come into the market is that prices are at an all-time low again. So there's a lot of activity, but there's also a lot of uncertainty."
Along with that uncertainty comes confusion. Sunshine cites recent front-page articles in both the New York Times and the Wall Street Journal that said the commercial real estate market is getting worse. "Yet when we're actually in the market, landlords are holding tough on rents for the moment," she says. "We're not seeing as much decline as you would think from the popular media."
Ultimately, "most nonprofits would like to stay put right now in this economy, if given the choice," Sunshine says. "But they're still looking for cost-effective alternatives," and such alternatives do exist. "Many landlords are in distress, where you can get a deal that is probably less expensive than it would have been six months now. There will be more properties in distress, and so there are many landlords that want to get good deals done."
The opportunity posed by a landlord's distress brings uncertainty of its own, as nonprofits are well aware. "If the tenant is big enough, they can negotiate a non-disturbance clause to their lease," Sunshine says. "That way, if a bank takes over the property, they're not affected. I'm seeing that more and more in negotiations."
At the same time, Sunshine says she's seeing more requests from nonprofits to negotiate for the ability to opt out of a long-term lease after five years, "and pay back all of the unamortized costs if their funding doesn't come back. That would be another way to alleviate their funding concerns. Landlords are more open to that than they were a year or two ago, in the good days."
Most nonprofits would prefer to renew in place if they can, says Sunshine. A potential snag is when "landlords start playing around the concept of rentable versus usable square footage, and increase it from one lease to the next. Nonprofits are not as sophisticated as your typical tenant. They're not set up as a for-profit business, and often they don't understand how a space can grow. It comes down to not what the price is per rentable square foot, but to what the gross rent is, and is it more or less than they're paying now."
Helping them in this decision-making process are the nonprofits' boards, who have the business savvy that the tenants themselves often lack. "If the numbers don't pencil out, they're going to move," says Sunshine. Then it becomes a question of how interested the building owner is in keeping the nonprofit tenant, she adds.
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Paul Bubny
Paul Bubny is managing editor of Real Estate Forum and GlobeSt.com. He has been reporting on business since 1988 and on commercial real estate since 2007. He is based at ALM Real Estate Media Group's offices in New York City.
