In the asset management side, do you see tenants– maybe they are not as liquid as they need to be or they cannot fund their inventory– feeling the effects of the market? Leading to increased rent roll exposure?

Obviously, customer spending is decreasing because of the rising cost of gas and the uncertainty of the Wall Street market. […] So we certainly are seeing tenants reporting lower sales; it’s just a matter of what percentage lower.

INS: Yes, what we see, for most loans a lender will try to get into the loan documents that the borrower has to periodically provide them with sales figures for the tenant– this is of course for retail deals– office tenants obviously there are no sales to track. The lender wants to know how his tenants are doing so he’ll be able to know that a tenant might vacate prior to them doing so. We have definitely seen sales drop, sometimes drastically, it depends on the tenant, the location of the property, and the demographics. A high income area might not be as affected as much as a lower income area where it might have a huge affect on sales. Obviously, customer spending is decreasing because of the rising cost of gas and the uncertainty of the Wall Street market. It has affected the spending on retail goods. So we certainly are seeing tenants reporting lower sales; it’s just a matter of what percentage lower. And then that goes back to your question, how low are they? Are they able to withstand these current situations? You would think a larger tenant with a natural presence might have that ability, that’s probably true for some, but we have some national tenants who are unable to. That is certainly something that lenders are paying particular attention to.

Are there any indicators of companies leasing up space– versus taking newly leased space, because of the increased vacancies? Are companies seeking out leases for entities that are failing rather than renting newly leased space?
INS: This is a good market to be a tenant if you are looking to lease space, like a retail, office, or industrial tenant because there’s so much vacant space coming available, practically every month. Landlords are desperate to get tenants to lease space, so the rent concessions, the tenant improvements allowance that landlords have been granting to tenants has been on the rise. Tenants in this market can request larger dollars for tenant improvement allowances. Certainly tenants are going to want the best location, and they are going to want new property. So if there is new space coming available, for instance, a new shopping center, they’re going to gravitate towards those spaces. For landlords with property that are 15 to 20 years old, they are going to have to increase their incentives significantly to get tenants into the space.

Can we expect, as a result, costs per square foot to increase or decrease because there is a higher level of concern and more level of expense with, say, build-outs because interest rates are higher? How does that filter down in this kind of market?
INS: The tenant’s occupancy cost might actually decrease when you take into account free rent, tenant improvement allowances, base rent decreases in many markets, et cetera. The landlords are seeing occupancy costs increase because vacancy rates are rising. The increases are coming from the increasing costs of utilities, management fees, et cetera, because when a tenant space is vacant, there is no tenant paying it’s pro-rata share of that expense. Therefore, it is paid for by the landlord until they can lease up that vacant space. So certainly for tenants, when you factor in all of these incentives, their occupancy costs may be going down. However, sales are going down too. So those two things might wash.