Leasing

Smart Leasing Strategies

Learn how office landlords are attracting tenants in slow markets.

By Bruce Baker, CCIM |

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.

Unfortunately, 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.

Even in 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 markets.

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 signage.

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.

The 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.

Not 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.

Two 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.

The 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.

Although 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.

New 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 lease guarantees.

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 virtually nonexistent.

Approximately 80 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.

Current 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.

To attract 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.

While 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.

Office 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.

Missing 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.

Takedowns 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.

In 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.

With 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.

Another 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.

Most 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 money.

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.

Landlords only 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 community.

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 since 1997.

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.