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Trends That Will Continue Until 2010

Everyone knows the state of the U.S. economy. It’s plastered all over the news multiple times a day. In fact, paralysis may set in if one ingests too much media. As companies continue to be on the brink of existence from continued slowed growth and increased losses each quarter, commercial real estate is no different. Real estate is like anything else: cyclical. In order to perform well, it is all about timing. The old buy low and sell high theory. Commercial landlords that bought at or near the top, who are highly leveraged and in dire need to lease vacant space are certainly feeling the crunch. Other ownerships that have sufficient equity in their assets are doing better, only because they have deep pockets to weather the storm. Either way most commercial real estate owners are giving away more concessions than ever to retain existing tenants and secure new ones. As the market continues to be in a state of flux, tenants must understand concessions offered by local landlords in order to maximize their real estate dollars. Below are 10 leasing concessions which space users can expect to enjoy in today’s soft leasing market:

1. Lower Rates: Rental rates have dropped by about 15% on average compared to early 2008.

2. Free Rent: Tenants should expect to receive 1.5 to 2 months of free rent for each year of lease term. Various landlords prefer to keep rental rates high and be generous with free rent. Other ownerships choose lower rental rates due to cash flow.

3. Tenant Improvement Allowance (TI): The overall amount of TI dollars provided is about the same compared to prior years. However, the dollars go further nowadays. It is quite possible to build a little more for the same price, or receive a credit on unused TI money.

4. Parking Fees: Monthly parking fees in UTC have also decreased by about 15-20% and tenants should expect to receive at least ½ of their lease term with no parking charges whatsoever. Del Mar Heights charges for reserved parking in hot markets, but today one can certainly negotiate reserved parking free of charge in this area.

5. Moving Allowance: Concessions such as this are a function of the overall deal coupled with rental rate, term, TI, free rent, etc. However, landlords who desire to fill vacant space are offering moving allowances ranging from $1.00 – $1.50 per square foot for incoming tenants.

6. Data Cabling: Landlords forbid tenants to use their TI money for data cabling since this improvement does not add value to the real estate. Times are different. Ask for the ability to spend the TI money towards cabling. The wish will likely be granted.

7. Lease Termination: Rights to terminate the leasehold are difficult to obtain in a hot market. Not today. If you need it, ask for it.

8. Renewal Rights: Most ownerships will only offer tenants a renewal right at fair market value. During soft markets, the probability of negotiating a renewal option with a fixed price is greater.

9. Building Top Signage: Typically full floor users and above will have rights to install building top signage. Nevertheless, assets that are suffering from low occupancy will pony up building top signage to tenants who seek smaller space.

10. Broker Bonuses: Tenants might not be in the know, but many landlords offer up to $2.00 per square foot as a bonus to the real estate broker on top of the normal commission. This gives an insight that landlords are spending more not only to entice the tenant, but also the brokers. Make sure your real estate professional is full disclosure on fees and how those are added to the equation.

Tenants should be well versed in these trends in order to maximize savings when shopping for new space or negotiating a lease renewal. Certainly not all landlords are in the same financial position. Some will endure the storm better than others. Others may give away the farm to fill vacant pods. Understanding the ownership make-up and debt structure is also a critical factor when negotiating lease concessions. Nevertheless, tenants who understand the leasing trends in today’s world and know which buttons to push will reap the benefits from the current real estate market.

Scot Ginsburg is a senior vice president of Hughes Marino, an award-winning commercial real estate company specializing in tenant representation and building purchases with offices across the nation. Contact Scot at 1-844-662-6635 or scot.ginsburg@hughesmarino.com to learn more.

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