2012: Office Tenant Concessions Continue to Shrink….Maybe Quickly

by CoyDavidson on January 17, 2012

Office Rents Haven’t Moved Much, but the Market is Improving in Houston

While there has generally been modest improvement in office market fundamentals across the country, some markets are performing better than others. Specifically technology or energy centric regions such as the Silicon Valley/Bay Area or Houston markets where job growth has been more pronounced the office market has generally recovered faster. As a result, there has even been some modest increases in rental rates particularly in the Class A sector or high demand submarkets.

While significant rent growth has yet to occur with few exceptions, the first sign that market fundamentals are improving is the reduction of attractive concessions offered to tenants to induce them to relocate or renew their lease commitments.

In Houston as we move through the recovery phase of the market cycle we are generally seeing clear evidence of the following:

  • Compression in the “ask” versus “strike” price in terms of rental rates.
  • Less free rent being offered.
  • Less liberal tenant improvement allowances.
  • Less abated parking charges or elimination of free parking all together.
  • Less willingness to agree to cancellation or space reduction options.

Many tenants have already taken advantage of softer market conditions either through restructured leases or early renewals. Companies who signed leases at the peak of the market in 2007-2008 and have not yet capitalized on the tenant-friendly market may find the window of opportunity closing very quickly provided the economy doesn’t slip in reverse. As a result, the impact of the reduced leasing packages Landlords are willing to offer can add up to several dollars per square foot in terms of your cost of occupancy.

Unfortunately, I can’t predict the economy with complete accuracy or I would be a very wealthy man and while there is still significant uncertainty regarding the economic outlook that persists and tepid investment confidence particularly in an election year, the consensus opinion among leading economist is for continued modest improvement in 2012. While we may still be a few quarters away from significant rent growth the attractive leasing packages offered by building owners are disappearing and this trend could accelerate very quickly. As a general philosophy in this current economic environment, the sooner you can address your future office space requirements prior to a pending lease expiration the better.

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