The Restructure
In markets like San Francisco where availability stands at ~30% and continues to rise, landlords of all stripes have either experienced or are poised to experience gaping holes in their occupancy. At the same time, occupiers having remaining term and paying pre-pandemic rents (meaning rents that are way above current market) are watching the building bleed tenants and seeing the landlord market comparable space at a substantial discount to their in-place cost with massive concessions. This is the perfect environment for restructure transactions.
What’s a restructure transaction and how does it benefit the parties? Restructures come in all shapes and sizes, but they always have 2 defining characteristics:
Create immediate cost savings and benefits for the occupier that would not otherwise be achievable until lease expiration.
Involve a trade of near-term savings for longer-term occupancy.
Occupiers benefit by accessing the soft market early and generating material cost savings. These savings can come in the form of reductions in leased space, reduction in rent, new concessions, or all of the above. And while the near-term savings can be significant, the transaction also allows the occupier to lock in long term value at currently depressed rental economics. The landlord benefit lies in stabilizing the occupancy and avoiding the inevitable bidding war that will result if trying to keep the tenant closer to expiration. Landlords are beginning to see their opportunity to retain existing tenants under normalized circumstances (e.g., when the tenant’s lease is nearing expiration), is limited. In fact, it’s highly advantageous for owners to seek ways of locking in the tenancy well before the tenant otherwise activates a market process. At that point, the degree of options available to the occupier and the extent to which landlords will compete for the tenant make securing a lease extension far more uncertain.
Not all landlords are positioned to participate in this type of transaction. Indeed, it’s best suited to those who are more cash flow oriented and have a favorable cost basis. These are the type of owners that can generate profit from market-based transactions (as opposed to many today who will lose money transacting at market). The exercise of exploring a restructure is pretty straight forward. It begins by assessing the extent to which the existing space meets the current and longer-range objectives. We then run a financial model to evaluate the comparative costs of staying in the existing lease and engaging the market based on the normalized timeline vs. an early restructure. We study the value proposition both from the landlord’s and the tenant’s perspectives. We can then establish a proposal structure to be presented to the landlord. We like to refer to this effort as a “free look” since there is no obligation to do the deal and in exploring its potential, the occupier does not give up any of its future rights. The outcomes range from nothing to a keen understanding of the landlord’s position and motivation - but no deal, to a restructure transaction that makes sense for all parties.
We’ve recently completed several restructure transactions, generating millions of dollars in immediate value for our clients. We’re always available to provide a no cost assessment of your current circumstances. It’s a high value consultation, in any case, as the process necessarily involves a deep dive into the full picture, including current and future market scenarios. Frankly, it’s exactly the type of exercise all occupiers should undertake at this time. We’re uniquely qualified for this type of assignment because of our extensive knowledge of capital and debt markets, our comprehensive research and our broad understanding of the distinct landlord motivation profiles and situational dynamics. If you would like to discuss underwriting a restructure, please reach out to us.