Office Investing: Treat it Like Growth Stock

"The good news is that our office vacancy rate has peaked at 21.5% in the 4th Quarter of 2003 and is now on the decline," Parker says. "The bad news is that with sluggish job growth, Denver, on average, is not projected to reach a stabilized office vacancy rate of 10% until 2009 or 2010.

"The thought of such a slow recovery can be unnerving, particularly if you are a landlord with substantial vacancy or an investor thinking about entering the office market," he says. "But remember these are averages." He adds that landlords can best the averages, with strategies that include early leasing restructuring and what he calls solution leasing.

"Tenants who signed leases in 1999 or 2000 are paying 20 to 35% higher rent than what the market is today," Parker says. "Combine this with wide spread job cuts and many tenants are seeking to restructure their leases early. As frustrating as this re-trade initially seems to landlords, early lease restructuring is an excellent opportunity for landlords to beat the averages over the next few years.

He says both tenants and landlords benefit from restructuring early 16 to 17 months before the lease expires. Solution leasing, he says, could be having an architect draw up sample floor plans, or better yet, having "plug and play" space ready with furniture, phones and computers.

"Equity Office is having great success with this method under their "FastOffice" program," he says. "You don't have to be a large landlord to take advantage of this method, however. Used furniture is still cheap and abundant and can often be acquired for pennies on the dollar from vacating or subleasing tenants."

Solution leasing, he says, is getting the "franchise tenants, the most desirable tenants in the market--those with national credit and growth potential," Parker says. "To land a franchise tenant you have to demonstrate your long-term commitment to shape your building around the needs of the franchise tenant, who may cost more initially, but will [offer] greater long-term value when the market recovers.