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Nervous Signs of the Times

Hughes Marino SeattleIt’s no surprise. Everyone knows how the commercial real estate market is performing. The dramatic rise in rents during years 2005 through 2007 has slumped. Cap rates are rising while investors sit on the sidelines. Landlords are now in fierce competition to secure new tenants in the market but also trying to retain existing occupants. Depending on the submarket, square footage leased, lease term, and creditworthiness, some landlords are offering up one year of free rent on new leases.

Back to basics is the name of the game. No longer do landlords prefer to sit on vacant space and watch their property appreciate in value versus enjoying a stable income stream. Right now, it is all about cash flow, which means tenants who pay rent. “What is it going to take to get this deal done?” has become the most commonly asked question in my day-to-day real estate world. Month by month, landlords are becoming more eager to fill vacant space by improving new suites on a speculative basis (spec suites); the “build it and they will come” theory. In addition, landlords are also focused on securing existing tenants far in advance of the lease expiration to avoid their tenants entering into competitive markets.

The following actions are the two most common signs that landlords are nervous:

Renew Them Early

Landlords are trying not only to fill their vacant space with new tenants but also be proactive by not losing existing ones. Tenants that have 18 to 36 months left on their lease term are often called by their landlord to renew early. This is a classic sign the landlord is fearful the market is headed south. The landlord’s objective: eliminate its competition. A landlord does not want its tenant to shop the market to find better economic alternatives which ultimately helps drive down renewal rates. Tenants who are approached by their landlord to renew early and are not paying above market rents, should sit tight and enjoy the inexpensive space.

Spec Suites

Vacant newly improved office suites in the 2,000 – 6,000 square foot size range usually lease faster than sitting as unimproved (shell) space. However, in a healthy market landlords prefer to leave new suites in shell condition so they can customize the improvements and eliminate the risk of wasted tenant improvement dollars. When the market is soft, many owners improve shell suites on a speculative basis in hopes of shortening lease-up time. In addition, many small tenants prefer not to deal with the improvement process from scratch and are more attracted to newly improved, move-in ready, space.

We all expect this commercial real estate market down cycle to last through calendar year 2009. The existing market poses well for users currently in the market for new space, renewing an existing lease, or for those who will be in the market soon. Feel free to push the envelope when negotiating a commercial lease in today’s times. While these rates have not fallen back to the dot bomb days, there has been a dramatic downward shift in the market, favoring the occupant.

Scot Ginsburg is an executive vice president of Hughes Marino, a global corporate real estate advisory firm that exclusively represents tenants and buyers. Contact Scot at 1-844-662-6635 or scot.ginsburg@hughesmarino.com to learn more.

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