Market Conditions Create Tenant Power Play
These are challenging times for office building owners. While several economic indicators suggest that a recovery is taking shape the weak employment data continues to delay recovery in the office sector, but it has also given corporate tenants substantial leverage in lease negotiations if they take the proper approach.
In Houston, we didn’t feel the recession as deeply as some parts of the country. However quoted rents are down approximately 8% over the last 12 months for Class A properties. Yet, quoted rents are only part of the whole picture. The spread between what is quoted and where deals are actually being signed has widened and the concessions we see landlords offering to attract and retain tenants today look very different than they did 12-18 months ago.
Concessions such as:
- Liberal Tenant Improvement Allowances
- Free Rent
- Abated Parking Charges
- Cancellation and Space Reduction Options
This creates the opportunity to leverage market conditions to minimize occupancy costs for several years going forward or perhaps trade up to a higher quality building at significantly lower costs than 12-24 months ago.
But I don’t want to relocate
Taking advantage of market conditions doesn’t necessarily mean relocating. Despite the numerous office space options that are available to tenants, many opt to stay put. The savvy office tenant understands a “well-orchestrated” market evaluation creates competition for their tenancy and the landlord is not going to offer the best leasing terms until he perceives the risk that relocation is a real possibility, or sometimes until they have “one foot out the door”.
A company must have a compelling reason to move and on average office tenants renew their office leases approximately 70% of the time. Landlords are well aware of this fact, as well as the time, expense and disruption of your business associated with office relocation.
What do I mean by a “well orchestrated” market evaluation?
- Hiring a qualified tenant representative
- A comprehensive market study
- Crafting an effective negotiation strategy
- Space tours with competitive buildings
- Requesting Leasing Proposals from candidate buildings
- Proper Timing: The more time you have to evaluate and negotiate the better. If you start the process two months before your lease is up, then the Landlord knows you are not serious about relocation.
In my 20 years of representing office tenants I have had many clients tell me initially they had no interest in relocating and after a comprehensive market evaluation end up making the decision to move after discovering a better option financially and operationally. Conversely, I have had clients tell me they absolutely wanted to move and after comprehensive evaluation, have their existing Landlord make the “Godfather Offer”, the proposal they couldn’t turn down.
Timetable for Recovery is In Question
Looking back just to the end of the first quarter of 2010, there was much more optimism in the market for the velocity of recovery in the Houston office market despite expected job losses at Johnson Space Center and the relocation of Continental Airlines as a result of the United Airlines merger.
However, that optimism has disappeared after a weak national jobs report for May, double-dip recession concerns and more importantly the B.P. oil spill which has the potential to have a significant impact on Houston.
This is the perfect time for real estate planning and strategy execution. Even if your lease is not up for some time, today many Landlords are much more amenable to early renewals. Tenants can now take advantage of the market instead of having it take advantage of them.