Smart Leasing Strategies
Learn how office landlords are attracting tenants in slow markets.
Free rent or increased tenant
improvement allowances? Long-term leases at fixed rates or short-term
leases with rights to expand? Landlords all over the country are trying
to determine the magic combination of terms and rates that will entice
office tenants to lease space in their properties.
no definitive answer exists. In today's office market, negotiations
continue to favor tenants, especially those renewing leases. In
secondary and tertiary markets, particularly in the Midwest, landlords
struggle to re-sign tenants seeking to capitalize on high vacancies and
depressed lease rates.
recovering markets, landlords must remain creative to retain tenants
and maintain property values. Commercial Investment Real Estate asked
several office leasing experts to share strategies and comment on
tenant activity in their markets. From expansion rights to boxes of
cigars, these ideas can help landlords stabilize properties in all
Landlords Offer Options in Columbus, Ohio
The office market continues to resemble the landscape around Ohio's
capital city: flat. The state of Ohio, the U.S. government, Ohio State
University, Nationwide Mutual Insurance Co., Bank One, and Limited
Brands retail stores are Columbus' largest employers. It is not unusual
to see one of these companies or an affiliate in the office leasing
market each quarter.
The Leasing Scene. The
options available to tenants searching for new offices seem endless.
Listing brokers must be more aggressive at showings to stand out, and
often landlords empower their brokers to offer strong credit tenants a
month of free base rent for every year of the lease term, moving
allowances of $2 per square foot to $4 psf, or, if available, exterior
Exterior building signage has
been a negotiating factor in Columbus-area new leases for Worthington
Industries, American Health, and Lawson Software. Building signs with
highway visibility soon will be up for University of Phoenix's 28,000
square feet at the Polaris Center of Commerce, CoreSource's 34,000 sf
in Metro Center office park, Lifestyle Communities' 30,000 sf at
Corporate Exchange, and Palmetto Government Benefits Administrator's
84,500 sf at Easton Way III. This clearly is a valuable tool when
negotiating against competing buildings.
landlords winning deals are accommodating tenants' uncertainty about
the economy by granting early lease termination options or shorter
three-year terms. Tenants unsure about growth needs have common
requests: termination options at the end of year three of a five-year
deal; first rights of refusal on contiguous space; and opportunities
for expansion space in large buildings. Thus, landlord flexibility
throughout the lease term is critical.
setting rates in the lease renewal option is one strategy important to
landlords waiting on economic recovery. A set renewal rate based on
today's market can prevent a building's value from increasing with the
economy. Typically, tenants accept renewal language that states they
will pay a market rate negotiated at the time of notice. In return
landlords offer termination options, 4 percent to 6 percent caps on
operating expense increases, and first rights of refusal.
Office Market Overview.
Overall, Columbus is seeing very few new leasing deals. Typical deals
range from 3,000 sf to 7,000 sf and 12,000 sf to 20,000 sf. Most
activity consists of tenants relocating from one suburb to another. For
example, CoreSource signed a deal to move from Westerville into 34,000
sf in Dublin; GatesMcDonald is relocating 100,000 sf from Hilliard to
downtown; and American Family Insurance moved 60,000 sf from suburban
Columbus to Westar. However, greater Columbus does not gain from
tenants shifting, as municipalities competing against each other by
offering increased incentive packages pushes rents even lower.
quarters of positive space absorption have raised both landlords and
brokers' spirits. In early 2005, Columbus landlords hope to realize
market momentum and negotiate leases with reduced concession packages.
They even may start to think about raising rates.
by Christopher J. Potts, CCIM
Concessions Abound in Corpus Christi, Texas
Situated on the south Texas Gulf Coast, Corpus Christi is the Coastal
Bend region's primary business center. Major employers include legal,
accounting, finance, banking, and government industries. In the early
1980s the oil and gas industry dominated the market; however, this
segment has yet to return at any measurable level.
Leasing Scene. Concessions recently became a hot topic due to the
addition of a handful of good-quality class B properties. Yet for some
tenants, concessions are not enough. Real-estate-savvy users are aware
of exactly what's in the market and are pushing landlords as far as
they can. Negotiations now start at least 12 months in advance.
free rent never completely left the market, it only recently appeared
in the class A sector. Landlords now are offering three to six months
free rent along with free parking to tenants with expiring leases to
lock them in for another three to five years. In some cases, a box of
the decision maker's favorite cigars may close the deal.
deals are even more competitive. For example, the leasing agent of One
Shoreline Plaza, a class A downtown property, seriously is considering
a five-year deal in which the tenant has offered to build out its own
space at $20 psf in lieu of an expenses-only lease. This will allow the
tenant to obtain a very attractive rental rate, while the landlord
mitigates risk by not allocating upfront capital for tenant
improvements. As it has placed significant personal investment in the
deal, the landlord also can expect some level of tenant loyalty. This
lease negotiating tactic lets owners be less demanding of personal
Office Market Overview.
Leasing activity has been relatively steady during the past two years.
The office market has not seen the sublease space influx reported in
the larger Texas markets of Austin, Dallas, and Houston, primarily
because Corpus Christi did not participate in the 1990s' exponential
growth. In fact, no new speculative office space has come on the market
since the late 1980s. The tenant base majority is 5,000-sf to 10,000-sf
users; office tenants occupying space in excess of 50,000 sf are
percent of the market's vacant space is located in the CBD, and a large
portion of this space is in two class A projects: One Shoreline Plaza
and Frost Bank Plaza. The market's high-end segment has experienced the
greatest amount of tenant movement. Traditionally, many companies have
been willing to pay a slight premium for high-quality space; however,
over the past two years, these businesses have reevaluated their
expenses, forcing landlords to become more competitive. For example,
recent tort reform in Texas has caused many area law firms to
reconsider their lavish workplaces. As a result, these tenants either
are becoming extremely aggressive in their lease renewal negotiations
or opting for high-end class B space.
by Joe Adame, CCIM, CRE, SIOR, and Christopher Adame, CCIM
Short-Term Leases Are Popular in Cedar Rapids, Iowa
This year, Cedar Rapids metropolitan area landlords are cautiously
optimistic. Lagging job growth is showing signs of life, as several
businesses plan new or enlarged facilities in the area. After several
years of increasing vacancy, softening rents, and escalating costs,
light is visible at the end of the tunnel.
The Leasing Scene.
Landlords are working hard to retain current tenants by offering better
service, holding rental rates at current levels on renewals, absorbing
tax and common area maintenance charge increases, accommodating space
reductions, and improving space for quality tenants.
space users are shopping the market at renewal time and letting
landlords know it. Tenants are requesting fixed rates for fixed-term
extensions to control their costs. In cases where landlords had
escalating rental rates, renewals are often at significantly lower
rates than tenants paid in the final year of their lease. To protect
themselves, office landlords are using short-term lease extensions or
options. By doing so they can bridge the soft period and recoup losses
when the economy rebounds.
prospective tenants, landlords are offering paid tenant improvements,
short-term leases with guaranteed options, and some initial free rent.
New tenants are negotiating rates with a sharp pencil in a market that
is currently oversupplied.
Office Market Overview.
Cedar Rapids has a diverse industry blend, including agriculture,
service,finance, and insurance. Major office users include MCI (whose
employment has droppe by more than 50 percent), GE Capital,
GreatAmerica Leasing Corp., and Toyota Financial Services.
Cedar Rapids is fortunate to have these major corporations, small
businesses drive the area's office market. Typical tenants are small
businesses or professionals needing 1,000 sf to 2,500 sf of space. A
5,000-sf to 10,000-sf lease is considered large.
rents appear to be stabilizing after several years of softening.
Vacancy follows national averages, with higher rates in the CBD and
some signs of increased activity in the suburban markets. Average lease
length is about three years.
from the market for the past several years are national corporation
satellite offices. As the economy declined, these tenants produced very
little new activity; in fact, many such offices downsized or closed.
One exception is mortgage brokerages, which entered the market to
capture the residential sales and refinance boom. Most of the leases
were written on two-year to three-year terms, and many of these
companies already are downsizing or leaving the market.
by Michael J. Shaffer, CCIM and Al Weaver, CCIM
Landlords Get Creative in Tulsa, Okla.
Formerly known as the oil capital of the world, Tulsa has diversified
its industry base, and many companies, including Vanguard Car Rental
USA, State Farm Insurance, MCI, and Decision One, have entered or
expanded in the market in the last few months. The city recently passed
an $885 million sales-tax-driven bond issue called Vision 2025 to help
Tulsa attract and retain quality jobs and promote economic development.
Projects include a new downtown convention center, higher-education
facilities, and other city-wide initiatives.
The Leasing Scene.
Most recent leasing activity consists of landlords battling for local
tenants. Many landlords have been very aggressive, negotiating earlier
with existing tenants to renew leases and providing rent abatement
concessions in exchange for longer lease-term commitments.
Additionally, landlords are offering renewing tenants new base years or
expense stops, which cap controllable operating expenses such as
management fees, landscaping, security, and maintenance costs.
A major tenant concern is the availability of expansion space, and
rights of first refusal are increasingly common. However, many
landlords are replacing rights of first refusal with rights of first
offer. Usually under rights of first offer, landlords give existing
tenants a certain number of days to respond to an availability offer
and agree on a lease rate. If no agreement is reached in time, the
landlord is free to market the space.
are another great tool for landlords, whereby a tenant pays on less
space for a given initial period of a three- to five-year lease and
takes the balance of the space later in the lease term. Takedowns are
advantageous for landlords dealing with tenants who have growth
concerns. Takedowns also help entice tenants to fill more space than
initially is required and are a good incentive for longer lease-term
commitments from tenants.
Office Market Overview.
Tulsa's job losses over the past two years have hurt office landlords
in every submarket. Average office occupancy last year declined 3
percent to 4 percent. A few suburban class B office properties have
seen a 50 percent drop in occupancy in the last year, which generally
is due to a large anchor tenant loss.
south Tulsa, One and Two Warren Place, with nearly 1 million sf
combined, are considered the rental rate benchmark for the class A
office market. The largest tenant in One Warren Place is Citgo
Petroleum, which recently announced a corporate move of 700 jobs to
Houston over the next 18 to 24 months. This move's effect on the
already weakened class A and B office markets is unknown, but many
experts belive that the property's institutional owners will not drop
their lease rates.
One of the largest
south Tulsa class B office properties is CityPlex Towers. CityPlex is a
2.2 million-sf complex that continues to have a strong effect on the
Tulsa office market because of its size, aggressive lease rates, and
leasing incentives. CityPlex attracts tenants with plug-and-play
cubical workstations that the owner purchased from a large collection
company that once occupied about 40 percent of the building.
the national economy recovering, some Tulsa companies are expanding and
hiring again. Many national companies still are stuck in wait-and-see
mode, but larger inquiries are starting to return. By the fourth
quarter Tulsa might see the return of sought-after 10,000-sf to
25,000-sf national credit office tenants.
by Patrick E. Coates, CCIM.
Patience Reigns in Kansas City, Mo.
Greater Kansas City's overall economy represents a diverse group of
companies ranging from agriculture to information technologies. The
service sector in particular has become a significant office space
user. Major employers include Sprint, the U.S. government, Cerner
Corp., AT&T, BlueCross BlueShield, Universal Underwriters Group,
and H&R Block.
The Leasing Scene.
One recent problem in the office leasing market is corporations'
uncertainty about long-term space needs. For example, at Corporate
Woods Office Park in South Johnson County, Kan., "Tenants who are
optimistic about the economic outlook are worried about their need for
expansion space and are unwilling to commit today. Business owners who
are pessimistic aren't sure what economic conditions will be in the
near future and shy away from any upgrades to their space," says Bob
Cattanach, CCIM, director of leasing for the property.
phenomenon somewhat new to the Kansas City market is a wide variation
of rental rates existing within the same building, forcing landlords to
be creative and flexible. "Five years ago, we had a well-defined box
for a deal. If the lease didn't fit our economic objectives, it was
rejected. Now, we look at deals from other perspectives. Net effective
rent is no longer the only criteria. We now look at cash flow, present
value, and future value," Cattanach says.
office tenants still seek space in traditional, multitenant properties
that are well located near their work forces. While not negotiating for
massive concessions as was done in the mid-1980s, tenants are aware of
the market's weakness and sublease space availability and are not shy
about asking landlords for free rent or additional tenant improvement
Most tenants near the end of
their leases speak to their current landlords about extensions and then
perform market analyses to determine their options in other buildings.
Generally, they are doing so early enough to have plenty of time to
make informed decisions.
moderately concerned with the state of the office market have not
inundated prospective tenants with offers of free rent or other
incentives. Instead they focus on building quality in their properties
by controlling expenses and keeping space in good condition. Leasing
agents have been actively marketing with broker open houses to keep
their properties in front of the commercial real estate brokerage
Office Market Overview.
With speculative construction activity generally low, the overall
office market absorbed more net space in 2003 than it lost in 2002.
Last year the market experienced the largest one-year vacancy decline
The current office market
cycle requires both landlords and tenants' patience to achieve the
desired results. The conservative business climate, while not promoting
a fast solution for higher vacancies and lower rents, eventually will
succeed in producing greater occupancy stability.