Leasing Strategies in Growth Markets

Communication is the key to managing tenant expectations.

From Atlanta to Dallas to San Francisco, the commercial real estate industry is booming. Strong economies are driving business expansions, and the demand for both new and existing office space is on the rise. As a result, markets across the country are experiencing high rates of net absorption and increased lease rates.

In Houston, for example, the energy industry is responding to an increasing worldwide demand for oil, gas, and reduced price volatility by adding staff, which is driving down vacancy rates in all key submarkets. As a result, tenants are finding lease rates on the rise with fewer space options available.

While low vacancy and higher rates are a boon to building managers and owners, it is essential that they maintain open relationships with their tenants who may not have anticipated the impact of these market conditions on their businesses. Managers and owners should always remember that high retention levels depend on clear communication.

Maintaining a constant level of communication with tenants before their leases are up for renewal helps avoid unwanted surprises. Owners should keep tenants informed of ongoing space opportunities and potential challenges. They also should work closely with them to manage expectations and plan for future needs. For example, before leasing space to a prospective tenant, a good practice is to explore the needs of current tenants and determine if relocation within the building could help them mitigate the cost of any change in their space requirements.

When representing tenants who are looking for quality space, it is important for agents to forecast potential rate changes and develop a space contingency plan. Fast-growing markets are landlord favorable, and tenants have less room for negotiation. Tenants can warehouse space for future growth under a lower rate term. In this situation, tenants need to consider an exit strategy such as cancellation options, downsizing options, and subletting and assignment rights. This will help them to avoid becoming locked into a long-term commitment for potentially unnecessary space.

Forecasting potential rate changes requires a strong understanding of market dynamics and open dialogue with clients. It is fundamental to recognize the forces driving higher rates to prepare clients for what they will find in the market. This includes fewer options, less time to shop around, and a quicker decision cycle. In such cases, tenant concessions and improvement allowances are reduced or even nonexistent, and abatements of rent and parking charges are a thing of the past.

Experienced agents also should understand the dynamics of a growth market and manage inventory accordingly. They need to take advantage of opportunities and maximize returns for building owners. Agents can push rates higher, but must take care not to create vacancies as a result of misreading the market or client base. The key strategy is simple -– communicate openly with tenants and prospects to effectively manage and meet their expectations.

John Spafford

John Spafford is senior vice president/director of leasing for PM Realty Group in Houston. Contact him at (713) 209-5823 or jspafford@pmrg.com.