This is Part II of a two-part series.

Kiell

Kaufman

Kursman

McCarthy

Jackson

Part I

Bradley Kaufman, a partner and leasing specialist in the real estate group at locally based law firm Pryor Cashman LLP, tells GlobeSt.com that owners will step back and lower rents when it looks like the light at the end of the tunnel is not in site. "If a landlord can hold out for six months and the market will head back up, then they do not look to lower rents, however if the landlord feels that we are in it for the long haul or if the sublease market picks up, they might have to rethink things."

Kaufman further explains that "what you have here is that it is easier for a landlord to increase a concession package than it is for them to lower rent. If you lower asking rents, you have to lower it across the board."

Benjamin Kursman, a partner with New York City-based law firm Herrick, Feinstein LLP, where he is a member of the real estate practice group with a sub-specialty in leasing, tells GlobeSt.com that even if there is no difference from an economic point--in terms of present-valued dollars--owners would rather provide a tenant with additional concessions before reducing the lease rent. "This is because rental streams are traditionally used to value buildings, and from the owner's point of view and from the point of view of potential lenders and buyers of the owner's building, lowered rents signify the reduction in the value of the building. Lower rents have an immediate adverse impact on the amount for which the owner can refinance or sell its building."

Kursman continues that "historically, in expansionary times, rents and prices rise rapidly, but in a downturn, those prices fall slowly, in part, because sellers and owners are in denial and are reluctant to accept that the value of their real estate has fallen. Of course, if the recessionary trend in the economy should become severe--as some economists have predicted--then concessions alone will not cut it, and owners will be forced to lower rents in order to fill space."

Ken McCarthy, managing director of Cushman & Wakefield's New York area research tells GlobeSt.com that offering these types of packages instead of raising rents can help entice a tenant who might be on the fence or waiting to make a deal. In addition, he says that keeping the face rents high gives owners more flexibility. "Landlords can offer discounts to one tenant for example, but unlike lowering rents, they don't have to offer it [concessions] to everyone."

Deborah Jackson, executive managing director of locally based Weiser Realty Advisors, tells GlobeSt.com that in regard to rent, "it is all about the total package, which includes base rent, escalations, free rent and allowances. Owners will play with the numbers based on market preference and their own needs."

Lisa Kiell, managing director of Jones Lang LaSalle, tells GlobeSt.com that as far as the New York City market goes, although a decline in asking rents typically coincides with a rise in vacancy rates, this was not the case during the first quarter of 2008. "Average asking rents actually rose over the past three months. Overall rents in Manhattan finished the quarter at $71.26 per sf, up from $68.87 at the close of 2006. Pricing for Midtown class A space similarly escalated, growing by 2.8% from year-end to $93.15 sf."

She further explains that while the change in asking rents may seem counterintuitive given the rise in vacancy, "it is important to note that the spaces being placed on the market are located in handful of Midtown's prime office properties. In fact, should space within any of Midtown's trophy properties come to market, it will likely be priced above market. Pricing among Midtown's trophy properties closed the first quarter of 2008 above the $120 per sf, at $120.90 per sf, up from $118 per sf three months ago.

Kiell adds that for deals currently in negotiation, "we're seeing building owners with class A spaces offer two months to four months extra in free rent and approximately $10 more in TIs [tenant improvement allowances] than we saw in deals that closed in 2007. Concessions increase further for buildings in secondary locations and for class B buildings." She continues that JLL has also seen some owners assume the costs for installing new bathrooms, upgrading HVAC and performing demolitions to secure good tenants. "Very little of this was included in deals negotiated and signed in 2007."

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Industry Watchers: Concessions Go Only So Far

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