It's A Tenant's Real Estate Market

Seldom are businesses rewarded for procrastination. However, if your business leases office, industrial or retail space and your business has been hesitant about renewing its lease, relocating, or opening a new location, listen up! Today you have been put on notice that now is the time to begin taking action.

Thanks to what some observers claim are the worst economic conditions since the great depression, most primary and secondary real estate markets across the nation have softened to the point where tenants now have leverage over landlords. And they will continue to soften over the next twelve months, I predict, until the recession abates. We are currently in a “Tenant’s Real Estate Market.” What does this mean for tenants? The attributes of a Tenant’s Market include: (1) abundant choices; (2) discounted rents to previous asking rates; (3) increasing concessions such as free rent, free or reduced parking, and larger tenant construction budgets; (4) flexible terms and conditions in the lease document; and (5) respect from landlords, even for the smaller tenants.

Here’s a quick example. My firm was recently retained as a tenant representative to help a small law firm relocate its offices. The tenant had selected its then current location years earlier during a strong market when landlords enjoyed leverage over tenants. The result was this small firm could only afford to lease office space in a tertiary office location, in a Class C building. Upon being retained, we searched within that tertiary market, but were unimpressed.

My client then asked me to search a prime office market that she had always found desirable but previously could not afford. We were pleasantly surprised by the abundance of choices – both listed in CoStar, a national commercial real estate listing service, and unlisted but available due to various landlords knowing that certain tenants were struggling. The final deal we struck was for great space in a Class B building, well located within this prime office submarket. The negotiated rent was approximately $2.00 per square foot per annum below recent asking rates, including a turn-key build-out and several months of free rent.

The financial benefits dropped directly to the bottom line of this law firm. But as important, this firm was able to improve its image, thereby aiding its ability to attract clients and employees. This move in the commercial real estate industry in known as a “Flight to Quality,” whereby a tenant purchases higher quality space in a better location at no appreciable increase in rent.

In a later post, we will tell the other side of this story – the landlord’s side. Stay tuned.