Commercial Investment Real Estate September/October 2013 - Page 29

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, “T e Numbers,” for a 2Q13 report.) T is ref ects the cautious attitude tenants still have about leasing of ce space. “I’m currently working on a deal with a national ten- ant for roughly 13,000 square feet,” says Adam Palmer, CCIM, managing director of the of ce division for Land- Quest 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 of ce space around the country report several factors that contribute to the slow of ce leasing market: tenants who examine every aspect of leasing of ce space, slightly improving markets burdened by too much space, and a new breed of landlords who can af ord to discount rents. T e result? Space searches turn into marathons jour- neys, and lease negotiations drag on and on, as tenants — especially in secondary markets with loads of avail- able of ce 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. “Ten- ants 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 f nancial strength prior to entering a lease.” In Phoenix and other markets, landlords are aggres- sively competing for tenants by lowering rents. T e prob- lem, Johnson says, is that low rents leave landlords little wiggle room for funding tenant improvements. “Tenants want to exhaust all options looking at existing, second- generation 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- 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 f nal lease rate.” Justin Horwitz, senior adviser for Sperry Van Ness in Phoenix, agrees that it’s been tough f nding tenants and landlords who can af ord build-out costs on shell build- ings. 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 mar- kets, such as Charleston, S.C., where of ce leasing is rap- idly improving, says Reid Davis, CCIM, SIOR, a principal with Lee & Associates in Charleston. “Competition for of ce space has re-entered the marketplace,” he says. “But the speed at which tenants make decisions has not changed.” Charleston’s of ce 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 of ce 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 f rst time in about six years. Quality Over Quantity Another way tenants are changing the game is through space use. “T e biggest dif erence in this cycle is how people are using space,” says Wayne Shulman, CCIM, senior managing director, Newmark Grubb Knight Frank in Chicago. “T e traditional of ce seems to be going out the door. Tenants of all kinds are looking for open of ce 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