Restructuring a Family Commercial Real Estate Business

Introduction

Over the last three years, the commercial real estate market has faced a number of significant challenges. Part of the reason for this is that the depth of the recession has had a profound impact on retail businesses, creating ripple effects for commercial property owners as various companies struggle to maintain their locations. This increases the likelihood that tenants may be forced to vacate the premises, having no means of affording the rent ("Commercial Real Estate Failures are Easy to Spot," 2010). This situation is problematic for property owners who are unable to re-let those locations and who may have debt service obligations they must continue to meet. Once this occurs, there is a real risk that the property owner could default on mortgage payments.

In the case of the three properties being examined here, it is clear they are dealing with challenges similar to those facing the broader commercial real estate market. Recently, the largest tenant from one property announced it will vacate the premises within six months. This is significant because it illustrates how the family business must be reorganized to adapt to current conditions. To achieve this objective, the paper examines: personal visions for life within and outside the business, an analysis of the various properties, the wants and needs of the business, and the wants and needs of other family members. Together, these elements provide the insights needed to restructure the family business and adapt to changing conditions in the commercial real estate market.

My personal vision in the real estate industry is to eventually own various luxury condominiums and commercial properties throughout New York City. This interest began at an early age, when I was first introduced to the real estate market through my father, who owns and manages a number of commercial properties throughout South Korea, where I am from. The family business was started by my grandfather decades ago. My mother and siblings have no interest in real estate. As a result, I plan to begin working in the commercial real estate industry once I have completed my education.

Personal Vision for the Business

The various properties the company owns carry no outstanding debt obligations. This will allow me to take some calculated risk in order to expand into the New York real estate market. Once the strategy has been implemented, I plan to travel back and forth between New York and South Korea. On a personal note, I plan to marry my girlfriend after graduating and intend to use the industry as a means of maintaining a comfortable lifestyle.

To effectively evaluate the different properties, it is necessary to conduct a regional analysis of the commercial real estate market. This is accomplished by examining supply and demand factors, rental rates, economic development in the area, financing opportunities, construction costs, and the employment outlook. Given that all three properties are located in the Syracuse, New York region, the various factors affecting these markets must be carefully considered.

Analyzing the Properties and Market Conditions

When looking at Onondaga County as a whole, a clear disparity is occurring in the retail property market. Rental rates and office vacancies have declined in Downtown Syracuse, while they have increased in suburban office properties. This has caused the available supply of office space located downtown to increase dramatically. Evidence of this can be found in a report conducted by CB Richard Ellis, which found that rent for commercial property in downtown Syracuse was $16.55 per square foot, while similar suburban properties were renting for $18.25 per square foot. At the same time, commercial property vacancies have risen sharply. According to CB Richard Ellis, the vacancy rate for offices in downtown Syracuse increased from 5.9% to 8.5%, while vacancies in suburban properties declined from 11.1% to 9.4% ("Market View," 2009).

In general, central New York experienced lower unemployment levels compared with the rest of the state, due in part to businesses relocating to the area over recent years as the city has been redeveloping its downtown region. Notable projects include the Clinton Commons Development and Armory Square projects, which increased the overall supply of available office space. Onondaga County construction costs vary between $85.00 and as high as $200.00 per square foot ("Syracuse Average Costs," 2007), while financing the purchase of properties has become more difficult due to the tight credit conditions facing many financial institutions.

When the individual properties are analyzed, it is clear that the Jefferson Center faces the greatest challenges, as the downtown market is struggling with an oversupply of office space and declining rents. The other properties, located in Liverpool and Dewitt, are situated in markets where rental levels are increasing and available supply is decreasing. This divergence between properties located in Downtown Syracuse and those in the suburbs shows how suburban locations have been better able to insulate themselves from the more severe effects of the recession.

Conclusion

Clearly, the real estate business being examined needs to restructure in order to deal with the various challenges it is facing. The imminent loss of the largest tenant, combined with an oversupply of commercial office space in downtown Syracuse, demands decisive action. To address these issues, the business must reorganize into a limited partnership, with an emphasis on increasing occupancy rates by offering lower rent and greater lease flexibility. This approach will help the properties located in Syracuse, Liverpool, and Dewitt achieve fuller occupancy over time.