Commercial real estate markets go boom and bust, but do strategies, practices and trends in handling office, retail and industrial leases shift with these cycles? The answer is yes—and no.
Sure, free rent or increased tenant improvement allowances rise with vacancy rates, and landlords offered plenty of both after the 2008 crash. As the market continues recovering, long-term leases at fixed rates are slowly overtaking short-term leases with expansion rights. Meanwhile, technology and accounting rules are spurring new ways of thinking on the landlord and tenant side—and brokers are in the middle, still trying to get deals done.
Considering these and other factors, it’s clear there is no one-size-fits-all strategy on either side of the negotiating table. Each deal has its own set of guiding principles and challenges that tenants and landlords are working to solve. And it’s that dynamic that sets the stage for competition among brokers as they race to overcome client challenges, get leases signed, and win new business.
“By nature, commercial real estate is imperfect as one can’t look up a ticker symbol to determine market value,” says Alan Kleber, managing principal at Cresa. “Value in our industry has been driven by internal and external influences that are different from building to building. Strategy is heavily influenced by having access to data and how landlords and tenants interpret that data.”
Office Tenants Looking for ROI
Data is top of mind for office tenants and landlords. Strong demand for class A office space is the trend as the market continues its recovery. As class A office fills up and the job market improves, industry watchers expect to see more demand for class B and C properties. Marcus & Millichap expects US office vacancy to decline 80 basis points to hit 15% by the end of 2013. That should drive up asking rents by about 2.5% as the net absorption of about 98 million square feet will far exceed the 52 million square feet of new supply nationwide.
Despite the positive deal flow, some commercial real estate agents say it’s more difficult to finalize leases in today’s office market. That’s because tenants and their advisors have access to more information that impacts negotiations. Kleber, for one, is spending more time in what he calls the “grey areas” of a deal where both parties can no longer impose the “we have never agreed to that” strategy. At the same time, Kleber says we’re in a period of re-creation and innovation for space occupiers across all industries.
“Tenants are seeking to establish returns for their investment in space. The question being asked is, ‘What are we seeking as an outcome associated with space and place?’ It is common knowledge that tenants are planning more dense work environments and the days of rows of private offices are going the way of the fax machine.”
Playing the Patience Game
Eric Groffman, a senior vice president at Transwestern, takes a contrary view. From his perspective, it is substantially easier to get office leases done today compared to the past 48 months because office tenants see that supply is diminishing and options are becoming scarcer than they were in previous years.
“The biggest challenge when dealing with a large project or large contiguous space is determining if you continue to wait and target larger users or break up space and cater to average demand of 8,000- to 10,000-square-foot users,” Groffman says. “That is always a decision the real estate advisor and landlord need to make together.”
Groffman speaks from experience. With the Total Bank lease at Miami Tower, he says his team came across plenty of deals they could have transacted that would have broken up its largest contiguous space. Ultimately, Transwestern decided to hold off and successfully secured one of the largest, if not the largest, new 2013 office deal in the Miami CBD. Cresa represented Total Bank.
Leasing in the Knowledge Economy
Yvonne Baker, a vice president at Jones Lang LaSalle, says office leasing hasn’t gotten any easier or any more difficult to transact. It still takes months to wade through layers of negotiations in most cases. But she agrees with Kleber that the level of sophistication has changed, with more technology driving information.
“The more a tenant rep can learn about ownership entities and how they are structured, the easier it is to get deals done,” she says. “If you are dealing with a REIT, it may offer incentives but rent is really important. You can pound on that landlord all day and the organization isn’t going to budge on the rent. So you need to understand who you are dealing with.”
Kleber doesn’t expect office leasing trends and strategies to change dramatically in the next 12 months. With limited new office supply, he predicts landlords will continue to work through inventories as a result of steady, but not robust, tenant demand.
“The 2014 tenant activity will primarily consist of smaller users of under 10,000 square feet,” Kleber says. “In general, landlords’ preferences are to offer substantial concessions in the form of free rent and tenant improvement allowances without significant reduction in rents, which preserves long-term asset values in the event of a sale. For tenants, there remain pockets of opportunity at buildings lagging occupancy within their respective comparable building set. We are witnessing the stabilization of the office market.”
Handling Retailer Downsizing
On the retail front, MMI points out that the influence of technology, demography, and economic conditions has created sweeping changes in where and how consumers shop. E-commerce now captures more of the consumer dollar and retail footprints are growing smaller.
MMI predicts US retail vacancy should reach 8.6% by the end of 2013, which will drive 2% to 3% effective rent growth. New construction, meanwhile, remains limited and less than what the market is demanding. Do retail real estate dynamics make a mark on handling leasing transactions? That depends, again, on whom you ask.
According to Jerry Welkis, president of Welco Realty and X Team International Partner, the downsizing trend is alive and well as retailers continue looking for ways to maximize sales per square foot.
“Some of these retailers have been affected by the continued increase in Internet sales,” he explains. “A couple of examples are Staples, which has been operating in the 20,000- to 24,000-square-foot range and is now downsizing to 15,000 to 12,500 square feet, and Best Buy, which has been operating in 40,000 to 50,000 square feet and is now looking at stores as small as 30,000 square feet.”