What Office Tenants Can Expect in Today’s Market

by CoyDavidson on February 23, 2010

Houston skyline at sunset

The  condition of the office leasing market both in Houston and nationally has been well documented over the last year and half.  The consensus opinion from most analysts, economists and real estate advisory firms that follow the office market is that leasing fundamentals have stabilized and the market has “bottomed out”.

While the velocity of the predicted recovery will vary from market to market based on office employment, there is no question that current market conditions have created opportunities for tenants to lower occupancy costs as benchmarked against historical costs from previous years.

Three Things You Can Achieve Today

Lower Rental Rates: In some major markets office leasing rates are down as much as 15-25% over the the past 24 months. Tenants in the marketplace today are demanding and expecting lower rental rates to be offered by Landlords in both renewal and relocation related transactions. In Houston, the impact of the recession has not been as severe and asking rental rates are only off 3-8% from a year ago, depending on the submarket. However, there is a noticeably larger gap between quoted rental rates and where deals are actually signed as compared to the market peak, where the strike price was much closer to the initial proposed rate.

Increased Concession Packages: There is no question the ability to negotiate significantly more attractive concession packages with most landlords in the form of tenant improvement allowances, abated rent and abated parking charges exists in today’s marketplace. Most all building owners, even those that  have been able to maintain relatively strong values with leasing rates have had to offer much more aggressive concession packages to retain tenants and attract new companies to relocate to their buildings.

Flexibility: In today’s volatile economy, many tenants signing longer term leases desire to have the luxury of structuring cancellation options into the lease agreement. Historically gaining this concession in lease negotiations has been reserved for the larger tenants and those with the most negotiating leverage in the marketplace. However, more companies in today’s competitive marketplace to attract and retain tenants are being successful in structuring cancellations options into lease agreements.

The Opportunity is Now

For many companies taking a defensive approach and surviving the storm has been the objective and long term real estate planning has not been a priority. However, as confidence in business conditions grows there is an opportunity to re-align real estate to improve your bottom line. The market is in the tenant’s favor, while nobody is suggesting a quick market recovery; any improvement in the market will make negotiating the most tenant favorable lease more difficult and the liberal landlord concessions will diminish. Taking advantage of current real estate market conditions is prudent for the forward thinking company.

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