The Dangers of Ignorance in Commercial Real Estate

Do commercial tenants recognize the dangers associated with not understanding the creditworthiness of their prospective, or even their current, landlords?  Standard operating procedure for most landlords is to gather financial information on prospective tenants and assess their associated risk before entering into leases.   Historically, commercial landlords, as a group, have been considered to be financially stable.   Tenants didn’t concern themselves with the possibility of landlords becoming insolvent.  

[youtube=http://www.youtube.com/watch?v=3Jz_tti4Ros]Despite some reports of stabilizing markets, in most of the country commercial real estate vacancies continue to rise, albeit at a slower pace.   Demand for office space remains very low, with little change foreseen in the short-term.   A substantially lower percentage of new leases are being completed than in previous years.  Many lease renegotiation transactions are taking place throughout the United States.  Lease renegotiation transactions often result in longer leases for less space.  While modifying existing leases in this manner could have long-term positive effects on landlords and the values of their buildings, the short-term effects of higher vacancies and the resulting lower positive cash flow could lead to devastating results for some landlords.   In the current global economic environment, many companies (tenants) previously considered to be rock solid are experiencing severe financial challenges.  Most landlords are stepping up their focus on tenant creditworthiness and are modifying how they negotiate leases to protect themselves.