Commercial Investment Real Estate is the magazine of the CCIM Institute, the leading provider of commercial real estate education. CIRE covers market trends, current developments, and business strategies within the commercial real estate field.
Issue link: http://cire.epubxp.com/i/164181
A stubborn office market vacancy rate still hovers around 17.0 percent nationally in second quarter 2013, only marginally below its 17.6 percent peak in 2010. (See Reis sidebar, "Te Numbers," for a 2Q13 report.) Tis refects the cautious attitude tenants still have about leasing ofce space. "I'm currently working on a deal with a national tenant for roughly 13,000 square feet," says Adam Palmer, CCIM, managing director of the ofce division for LandQuest Commercial in Fort Myers, Fla. "Negotiations are ongoing as they have been for nearly a year. While the market is improving, nearly all deals seem to take much longer to complete these days." Commercial real estate professionals who lease ofce space around the country report several factors that contribute to the slow ofce leasing market: tenants who examine every aspect of leasing ofce space, slightly improving markets burdened by too much space, and a new breed of landlords who can aford to discount rents. Te result? Space searches turn into marathons journeys, and lease negotiations drag on and on, as tenants — especially in secondary markets with loads of available ofce space — hem and haw and run the numbers once again. Decisions, Decisions Like Goldilocks, many tenants are looking for a space that's not too big and not too small, but just right. "Tenants scour the market to learn about all the available options," says Julie A. Johnson, CCIM, executive vice president of the Healthcare Investment Group at GPE Commercial Advisors in Phoenix. "I also see tenants interviewing landlords to understand their fnancial strength prior to entering a lease." In Phoenix and other markets, landlords are aggressively competing for tenants by lowering rents. Te problem, Johnson says, is that low rents leave landlords little wiggle room for funding tenant improvements. "Tenants want to exhaust all options looking at existing, secondgeneration space that they can renovate [at a lower cost] rather than consider building out a shell space," Johnson says. In a recent deal, the tenant extended the lease term by two years to give the landlord more time to amor- CCIM.com tize high TI expenses; the landlord agreed to amortize with no interest charge as well as include a termination and penalty clause if the tenant did vacate early — "all to incentivize the tenant to come to the property and maintain a competitive fnal lease rate." Justin Horwitz, senior adviser for Sperry Van Ness in Phoenix, agrees that it's been tough fnding tenants and landlords who can aford build-out costs on shell buildings. Tenants need the timeline and the desire for brand new space, he says, and "owners need to be extremely aggressive on the amount of money they will contribute to the improvements." He's completed several lease deals in the Rome Towers mixed-use development in Gilbert, Ariz., where the landlord contributed $60 per square foot in TI expenses. "Without that level of contribution, those deals would never have had a chance," Horwitz says. Indecision is also plaguing tenants in stronger markets, such as Charleston, S.C., where ofce leasing is rapidly improving, says Reid Davis, CCIM, SIOR, a principal with Lee & Associates in Charleston. "Competition for ofce space has re-entered the marketplace," he says. "But the speed at which tenants make decisions has not changed." Charleston's ofce market has picked up to the point where new construction has begun, Davis says, even a few speculative buildings, driven in part by Boeing's decision to open an assembly factory in the area. "While activity is up in ofce leasing, most transactions still remain volatile until the very end and are viewed under a microscope by the decision makers," Davis says. But some tenants are getting the message to lock in rates now: Rents have trended up for the frst time in about six years. Quality Over Quantity Another way tenants are changing the game is through space use. "Te biggest diference in this cycle is how people are using space," says Wayne Shulman, CCIM, senior managing director, Newmark Grubb Knight Frank in Chicago. "Te traditional ofce seems to be going out the door. Tenants of all kinds are looking for open ofce areas where people can collaborate. And workstation size is smaller so people can communicate more freely within a team or a division." September | October | 2013 27