Trading Places

by CoyDavidson on October 29, 2010

open office

Trading Up for More Exclusive Space

There has been a lot of discussion recently of how office tenants are approaching real estate these days and reacting to market fundamentals in the current economy, including;

Exercising Early Renewals: There is no question many savvy tenants have taken advantage of market conditions by exercising early renewals to capitalize on lower rental rates and more liberal concessions being offered by office building owners.

Maximizing Office Space Utilization: Today, many companies are examining in much closer detail their office space utilization, with the objective of doing more with less.

While companies are clearly making cost conscious decisions, I personally have not seen many companies or my clients opt for significantly higher density in their office layout when relocating or restructuring leases. I am not questioning whether the trend exists, I believe it does at some level especially among larger companies. Generally speaking, I have seen companies in Houston either consolidate locations and lease less space based on lower head counts or take relatively the same amount of space.

Trading Up in a Soft Leasing Market

The office market’s recovery is somewhat fractured, with top-rated buildings seeing the highest demand as firms take advantage of depressed rents to trade up for more exclusive space.

The one trend I have seen that is more prevalent is companies trading up to higher quality buildings, making the move from Class B to Class A buildings or even from older Class A to the newest state of the art Class A construction.

I have recently negotiated a lease for a client enabling this tenant to trade up from a solid Class B building to one of the top Class A buildings in their submarket, at a cost 20-25% less than would have been possible 6-12 months ago. In the end the Class A building owner put terms on the table comparable to what the Class B building owner offered to renew the tenant, which in my opinion were fair market terms.

The Risk in Trading Up

The one question I ask my clients, as they consider the trade up scenario is; “Will you be prepared to renew or relocate if the market shifts back to the Landlord’s favor at the end of the lease term and your building is commanding premium rents?” Making that decision is different for every tenant, not every company needs to be in the very best buildings in the marketplace, but for many the benefits of higher quality office space is worth the risk of the unknown 5,7 or 10 years down the line.

Get into the Marketplace

Today, market fundamentals are creating select opportunities for office tenants who undertake a comprehensive and credible market evaluation. In the case of my client it was the right tenant, the right building owner, the right space vacancy with the right timing. I believe more than anything, office tenants are looking for value. Unless you get into the marketplace with the assistance of a high quality tenant representative, these opportunities can be missed.

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