Protecting Tenants From Landlord Office Defaults With Vinny Di Meglio, Real Finds Podcast #29 Transcript
Gordon Lamphere: Hi, I’m Gordon Lamphere with the Real Finds Podcast, a podcast series where we interview key entrepreneurs, scientists, and activists who are shaping real estate and, as a result, our world. Today we have Vinny Di Meglio on the podcast. He’s an office expert in the New Jersey market who works with both tenants and landlords, and he’ll give us insight into what’s going on in New Jersey and the broader market, both on the debt side and how it affects tenants. If any of our listeners are worried about the state of the office market, it’s well worth a listen. Vinny, thank you so much for hopping on the podcast today.
Vinny Di Meglio: Thanks for having me again, Gordon. Appreciate it.
The Landlord Crisis From the Tenant’s Side
Gordon Lamphere: A lot has happened since we last recorded. One thing we wanted to bring up is the crisis landlords are experiencing. It’s been beaten into the ground in every piece of media you consume, from the landlord side. What we want to talk about today is how it’s affecting tenants. You’ve dealt with that in New Jersey. What are you seeing in the Garden State?
Vinny Di Meglio: It’s a really good question, and to your point, it seems to be the only thing in the media right now, which is nice, because sometimes it’s good to get different headlines. It’s all cyclical. I go back to something I’ve told people for years: you have to look at your landlord as a business partner. You have to make sure you can go to work, that the lights are on, the HVAC is working, and somebody is there to fix any issues. The worst-case scenario is the landlord gives the keys back to the bank. The bank isn’t in the business of being a landlord, so now nobody’s taking care of the building. Why are the lights not on? Why is it too hot or too cold? This is not an ideal setting for my people to do their best work.
Are we seeing that in New Jersey a lot? We’re starting to. I think it’s on the rise in certain buildings still suffering from the work-from-home trend, where tenants are downsizing and giving space back. But it’s not a rent collection problem, and I want to make sure people know that. They’ll look at a building, look at the parking lot, and say, no one’s here, this landlord’s giving the keys back. But the building’s leased. The tenants are paying rent. They have a few years left. Maybe somebody’s marketing space for sublease, and people come in Tuesdays and Wednesdays. That landlord might not technically be suffering right now. It could be that a loan is maturing and they’re having trouble getting financing. I’m hearing that from a lot of my landlords who are stable: their lenders are nervous about the future of office, so they’re not getting the rates they had or wanted, which throws off their whole NOI balance. It costs more to mortgage the building than before. So now what? Do I increase rents? That’s really tough to do right now. It’s a weird balancing act. But from a Princeton-specific point of view, I don’t think we’re at a place where owners are giving the keys back in droves. There are always a few bad landlords in good markets and bad, who give the keys back because they didn’t do a good job with their building. We’ll see that in a few places. There are a couple of buildings in receivership right now, beautiful buildings, bad owner, but at least somebody’s there trying to right the ship. It’s a vague answer, but on a macro level, it is happening, and it’s something tenants need to be careful with.
The Most Underrated Amenity Is a Good Landlord
Gordon Lamphere: I want to touch on two things you said. First, there’s a building I can see from my office window right now that we don’t manage, with eighty percent occupancy on paper. If you looked at it on a Friday, you’d say, my gosh, this building is going under. But that’s a ten-year lease with a high-credit tenant. That building will be fine for probably eight more years. There’s a lot of that in the market, and there are also a lot of buildings in trouble that have cars in the parking lot, for a range of reasons including mismanagement. The most important thing you touched on: I had a mentor who recently passed away who would say the most under-discussed amenity in a building is a good landlord. That means someone proactive, financially stable, and experienced in the market through turbulent times. How can a tenant protect themselves from the pitfalls of a bad landlord? I’m fighting one on behalf of a tenant right now.
Vinny Di Meglio: There are more tenants asking to see landlord financials now than ever before. Next week I’ll finish fourteen years in the business, and when I got in, in 2009, the world was a weird place. This is the first time I’ve seen it go in the opposite direction. Landlords are always asking tenants for financials to make sure you’re a good investment for their building. What about the other way around? Mr. or Mrs. Landlord, what can you show me that gives me confidence you’re not going to hand the keys back tomorrow? Whatever you can get that shows the landlord’s financials, I think that’s important. By the way, we just had a landlord reject the request. It’s a hundred-million-dollar building. From their perspective, they said, come on, we’re investing in the building, you see us adding amenities, we don’t have much vacancy, what’s the concern? Well, a hundred-million-dollar building is expensive to carry, and maybe you have a loan coming up. So you won’t always get full cooperation, but if you can get it, it matters.
Then, just ask the question. Brokers who’ve been in the market a long time can tell you historically how certain landlords operate. Do they come from a good place? Do they mean well? Have they given the keys back on this building and that building in nearby markets? They’ll probably do it here. Even before COVID, I’d tell people, I put a building on the survey, but I don’t want to take you there because it’s a bad landlord. They don’t take care of the building, and I don’t think they’ll treat you well, so let’s move on. From a broker’s point of view, we need more communication than we’re used to, because what you don’t want is to tell your client, don’t worry, it’s a good landlord, and six months later they give the keys back. We can only give the best advice we can.
I have a situation right now you’ll appreciate, and so will your listeners, because I’ve never seen it until now. There’s a 100,000-square-foot building that sold. It took the buyers about two years start to finish to buy the building, which sounds crazy. They paid all cash, around four and a half million, about forty-five dollars a foot, so essentially getting the building for free. But it needs a ton of improvement, and they were going to put a couple million into renovating it. Now they can’t get a loan. From the time they started two years ago to now, lending has changed. You know what they did? They kicked everybody out of the building and let it go dark. They said it’s better to pay our real estate taxes and minimal expenses to keep the building running than to keep tenants, because your rent doesn’t cover all the other necessary expenses. Probably nine months in advance, I reached out to a client in the building and said, here’s what’s coming. I don’t think they wanted to believe it, because they love the building and their view. It wasn’t until they officially got notice that they said, we should have listened. Now they’re scrambling. Thankfully we found a great building that’s a perfect fit, but it doesn’t always happen that way. So, to come full circle, you can think you’re leasing in a building with a great landlord, which that building had for two decades, and then it sells to somebody who isn’t nearly as qualified. You can only do so much. It’s rolling the dice. Buildings trade, owners change, some are good and some are bad. Just keep communicating with your broker, because they’ll tell you their experience with that particular owner.
Gordon Lamphere: In our market we’ve seen a lot of craziness with landlords. A broker was telling me there was trouble with a regional bank in New York and that the regional banks were in a lot of trouble. We were doing a regional bank deal in our area and wanted to see financials, and they were very cautious about showing them. Then the weekend came, and we found out the bank the broker had mentioned was going under. I’m pretty sure everyone knows which bank. On Monday morning, that bank was much more willing to show financials, because they realized it’s a pressing problem for a 10,000 or 15,000-foot office lease. As we get into this new world, I think norms will change in the interplay between tenants and landlords, and people will be increasingly open to opening their books, particularly for 10,000 to 20,000-foot office deals, which are increasingly rare in some markets.
Return to Office in New Jersey
Gordon Lamphere: I wanted to double back to something from our last episode: what’s going on in the New Jersey market as a whole, which is very similar to Illinois in a lot of ways. What are you seeing in return to work and the hybrid model?
Vinny Di Meglio: I have about 1.2 million square feet in my agency portfolio, total space, not vacancy, and I’ve been busier through June, July, and the first week of August than I would have expected. We’re showing a lot of space. It’s busiest in the big block, 30,000 to 50,000 feet, and under 10,000 feet. A lot of activity in those two ranges and not much in between. But activity is good. As I mentioned on the last podcast, I’m a big Yankee fan and a big Jeter fan. Jeter is one of the best to do it, and he did it hitting lots of singles and doubles. In most markets, the bulk of activity is deals under 10,000 square feet, so it’s positive to see that. Some of it is people downsizing. There’s a 40,000-foot office tenant right now going down to 10,000. That sucks. You don’t want to see somebody give 30,000 feet back, but that’s the nature of the beast.
As I’ve said a million times, being in Princeton puts us in a phenomenal location, ripe with great, growing pharmaceutical companies. Without them, the statistics would look far worse, because they’ve been eating up a lot of the vacancy. Another pharma company is working on an expansion, taking three floors in a building, about 135,000 square feet. That’s huge for this market. How many 30,000 or 5,000 or 4,000-foot vacancies need to come back to make up for that one deal? That’s a big deal in a suburban market of only 25 million square feet. I tend to be an eternal optimist. Everything that goes up must come down, I get it. But everything that goes down is likely to come up. Yes, tenants have pulled back on space in light of hybrid work. Fine. They’ve set a new equilibrium. I was 40,000 feet, now I’m 10,000. From 10,000, you grow back to 40,000. That might take ten years, or it might happen next year. We’ve seen BlackRock, which has a substantial presence in this market, mandate return to office five days a week. Their people might not come back five days. They might get real pushback. But as you look at the news, you see more and more employers trying to get people back.
Look, Gordon, it’s going to be hybrid. It’s always going to be hybrid now. I don’t see us ever going back, and I fully accept that. But I don’t accept that everyone will throw their hands up and say we don’t need office space anymore. That’s never going to be the answer. I just got lunch in a cafeteria here in Carnegie Center, which is predominantly owned by Boston Properties. They have this beautiful cafeteria they spent millions on. I don’t usually go there, but today the world took me there, and there must have been fifty people in it. That’s a huge number for any cafeteria in a suburban office building. So we’re slowly seeing people come back. And what I shared with you before, which I’m excited to tell your listeners: I had a showing this morning with a company that went remote and started hiring people wherever they could. Now they want to be in the office three days a week, and they’ve hired a cohort of about seventy people in and around Princeton. Now they need a Princeton office that never existed. Assuming they go through with the transaction, that’s 15,000 feet of positive absorption from a company that was never here, due to their remote work policy. I’m not saying that’ll be the case for everybody, but you take the good with the bad. There will be people who decide hybrid didn’t fit, and bring people back, or, remember the hub-and-spoke talk at the beginning of COVID? I don’t know that we’ve seen a lot of it, but I do believe it’s a good model. You don’t want to drive an hour to the office, so let’s have three offices spread across a wider geography so everybody has a ten or fifteen-minute drive. There are so many ways to go about this. Just saying everybody work from home will work for some, but not for everybody. That’s why we’re seeing this activity: people trying to figure out what the future holds and what their space needs are. You must be seeing it too. People still have no idea what they want. That’s why you have people in Tuesday through Thursday, saying, we’re experimenting, thank God I have two years left on my lease so I can figure out what’s best for us.
Gordon Lamphere: That’s interesting. We had folks on last year from Madison, Nashville, and a couple of other secondary and tertiary markets saying similar things, that they’re seeing growth that came from hybrid or remote work, with companies looking for offices and sales offices around clusters of employees. For us, we’ve seen a bit more hub and spoke than some other markets. I’ve heard the same from brokers in LA and New York, that within those metro areas they’re seeing more hub and spoke. But it’s fascinating to hear cluster-based growth over and over from smaller, regional markets.
Office Conversions and Displaced Tenants
Gordon Lamphere: I wanted to touch on something you mentioned earlier. Increasingly, a lot of landlords are downsizing and looking toward conversion, office to residential or office to industrial. That puts tenants in a precarious situation where they see their building drain out and think, I’ve got four years left on my lease, what happens if this building gets converted? Is that something you’re seeing? Chicagoland is starting to move toward a conversion model.
Vinny Di Meglio: We’re smack in the middle between New York and Philadelphia, with the ports along the New Jersey Turnpike, so it’s a very robust industrial market. It’s not something I focus on, but we have historically low vacancies and historically high rents, so owners want to convert. There isn’t enough available land, and you have residents complaining about pending developments, rightfully so in certain areas. But I think the conversion conversation is awesome, and I’ll tell you why. Take this market, about 25 million feet. From my point of view, we have about three million square feet, call it ten percent of the market, that’s just obsolete. So if we had ten percent vacancy, it actually means we have no space, because the ten percent left is old, worn out, and nobody’s interested anyway. A lot of those buildings have some tenants here and there. Out with the old, in with the new. As long as you treat that tenant fairly on the way out, give them notice, maybe pay for their relocation, anything to make life easy, I think it’s okay. It’s precarious, and nobody wants to be displaced, but sometimes you don’t know how exciting an opportunity can be until you get there. “But we love it here.” No, you think you do, because it’s all you’ve known. Now let’s put you in a building where there’s some life, an owner who cares and maintains it, and God forbid, an amenity. Your people will be so happy. So not only do you get rid of bad inventory and bring overall vacancy down, you take those tenants and put them in other buildings, and you get more positive absorption in buildings that are actually being taken care of. It’s a holistic approach.
Here in West Windsor, when you drive around this part of New Jersey, there’s a very cohesive feeling to the office buildings. You wouldn’t have a Red Lobster next to a Class A office building next to an apartment building. It just works. There aren’t company names on top of every building. It feels professional. So when you take a decrepit old building out of the mix and put something new and fresh there, multifamily, which is completely underserved nationally and here in New Jersey, that’s a great conversion. Do we need warehouse? Yes, but it’s kind of overkill now. If you have to, you have to, and warehouses are really nice-looking pieces of real estate now. So visually and aesthetically, it adds to the overall appeal of the area. Nothing I’ve said leads me to believe these conversions are a bad thing. It’s just got to be done the right way.
Gordon Lamphere: The biggest thing is for tenants to fully understand how they’re protected in their current lease, and when they look at a new building, put those protections in place. I’ve seen notice periods that are borderline criminal, where the landlord has thirty or sixty days to kick somebody to the curb. That’s bad drafting on the lawyer’s side and bad work from the tenant rep. But overall, I think you’re right. When I’ve seen folks removed from buildings, they generally end up in much better stead after a bit of a transition. We had an engineering company recently get booted for a conversion, and now they’re in Class A space paying about twenty-five cents more a foot for three times the quality. Tenants just need to understand where they’re sitting, and not cannonball into the pool without understanding how the lease is structured.
Vinny Di Meglio: I know my strengths, and I think I know some of my weaknesses. I tell people, I’m not an attorney. I’ve read through enough leases to know enough to be dangerous, but the best advice I give tenant clients is to hire an attorney. Not your buddy who does very different attorney work, but somebody looking at commercial leases day in and day out who understands exactly what protection you need. The building I described that’s gone dark, kicking tenants out, I think what they’re hanging their hat on is that the tenants aren’t big enough to sue. They’ll just kick them out and hope for the best. And maybe that’s the case. Why spend thousands in legal bills to fight when I might as well find new space? The building is being mismanaged anyway; it’s probably better to leave. But it shouldn’t have to be that way. You should have language in the lease that protects you from that.
One More Thing: AI
Gordon Lamphere: Before we go, this podcast is about reaching out to other markets and getting new eyes on real estate problems and solutions. What’s one thing we should be talking about that we haven’t mentioned today?
Vinny Di Meglio: I’m glad you asked, because I was thinking of bringing it up. AI. I don’t know if you saw that JLL announced this week they’ve launched their own platform, JLL GPT.
Gordon Lamphere: I saw that.
Vinny Di Meglio: I’ve been playing with it. I’ve been using ChatGPT at home. It creates really great stories for my kids at night, stories I can’t make up on my own. But I started simple: give me a list of tenants in Princeton with leases coming up in the next two years. It doesn’t have that information. Who are the top employers? It has that. Who’s growing? There’s some good basic intel. You can also type in language from a lease. Say I’m in a pinch and don’t have an attorney, but I want an educated conversation with my client, so let me take the lease language and have it translated into something more digestible so I can explain it to the tenant. I don’t think that even scratches the surface of what AI and technology like ChatGPT can do. It’s a learning technology. I’m excited JLL has its own platform, because it’ll help us get answers to clients faster than our competitors and put us in a position to win more business. Overall, businesses should be looking at this technology closely to see how it can serve them day to day.
Gordon Lamphere: Phenomenal topic, and I’d say check out our last podcast, where we discussed that in depth with an AI futurist. Before we go, thank you very much, Vinny. It’s been great as always, and we’ll have you on in the future.
Vinny Di Meglio: Thank you, Gordon. It’s always fun. I appreciate it.
Gordon Lamphere: Thanks again to Vinny for hopping on the podcast. If you’d like to get in contact with Vinny, we’ve put several links in the video description. If you enjoyed the podcast, please give us a like, a five-star rating, or a review. Your comments, interactions, and subscriptions truly matter and help us continue to provide quality guests. You can follow us on YouTube, Spotify, or wherever you get your podcasts. I’m Gordon Lamphere with the Real Finds Podcast. Thank you for listening.
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