"Different landlords are going to take a stronger position than they did last year," Robert Stella, EVP and principal at CresaPartners, tells GlobeSt.com. "But nobody in New York rolls over and plays dead in terms of giving things away. You always have to fight for it." That said, Stella says that in contrast to the downturn of the early 1990s, in which building owners took about two years to respond competitively to a declining market, "landlords reacted very quickly" this time around.

Whether landlords will be quite as willing this year to provide rent concessions and stronger work allowances is very much on "a case-by-case basis depending on the building and the landlord," Stella says. "If a building has 10% vacancy as opposed to 30% or 40%, that landlord may not have to be as aggressive as someone who has a major vacancy. But they're not going to be silly and lose a good tenant. Compared to what tenants were getting 18 months ago, it's still going to be very sweet for them."

Stella predicts that the market will hit bottom in terms of rents and vacancies sometime in late summer or early fall of this year. In the meantime, "the vacancy rate is not rising as quickly as it did in the first six to eight months of the financial crisis," he says. "So the drops on the rents are much less."

On the other hand, space givebacks loom from tenants that have already committed to relocate from their current offices. "And there's probably one million square feet of shadow space in various pockets around the city," Stella says.

But he notes that a lot of the better quality space that was previously given back is already moving. For example, when law firm Heller Ehrman dissolved in September 2008, its space at Boston Properties' Times Square Tower was a hand-in-glove fit for another firm, Pryor Cashman, which moved in a few months later. "That kind of space is going to get a lot more attention than an old, tired installation in a B-plus building," says Stella.

Of course, this being the market that it is, '10 will also mean properties and owners going into distress. "We're starting to see some of that already," Stella says. "A lot of the tenants looking at these buildings find out that they don't know who the landlord will be. If the tenants don't have their own cash to do construction, they may be able to get a sweetheart of a leasing deal, but the funds they thought they could obtain for subsidizing the build-out may not be there. If the tenant can't finance it, they've got a real problem."

As a result, some tenants are steering away from this potential pitfall, notwithstanding the attractive leasing terms and rent concessions that may go with it, Stella says. "Given the environment we're working in, that's just one less thing to have to worry about." This is especially true if the tenant is considering relocating rather than renewing in place.

Stella says the advice CresaPartners gives tenants hasn't changed materially since last year. "We're still advising people that if their lease is up in the next 24 months, start making those evaluations now," he says. "On a case-by-case landlord-by-landlord basis, they may be able to renegotiate their lease early because it's advantageous to the landlord to do so."

The market, he says, "has gotten to the point where landlords know what they have to do. A year ago, it wasn't quite certain as to when the market was going to hit bottom. The drop was so quick that it was hard for anybody to grasp. But here we are, and we won't be at the bottom forever."

Instant Insights /

Office Landlords Pull Back Slightly on Concessions

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