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-
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 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.”
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