Owners Add Incentives, Tenants Resist

Sacramento area tenants are "taking control of the market with short-term lease demands," Robert Dean, executive vice president and managing director of Grubb & Ellis' Pacific Northwest operations, says in the company's quarterly market survey. CBRE's report says that, "Even with the numerous incentives provided by landlords, tenants are reluctant to take advantageof these extraordinary deals because of the increasing uncertainty in the economy."

The CBRE report cites concessions that include free rent in the amount of one month per year of the lease term and, in some cases, two months for every year of the lease. It also lists expensive TI packages, furniture and moving costs, along with asking rents that in some cases are dropping by five to 25 cents per square foot per month, depending on the property.

"Tenants are expressing that there are too many unknowns, and they are unwilling to take on the risk of expansion in this volatile environment," CBRE's report explains. "This is why the majority of lease deals being completed are short term renewals ranging from 12 to 24 months, withan occasional long-term, five-year renewal."

CBRE has identified a new trend that it says will become more prevalentin the next three to six months: the sale of distressed properties in the form ofshort sales, or properties going back to the banks and being sold as foreclosure sales. "Buyers waiting on the sidelines will be able to purchase these buildings for pennies on the dollar, thus enabling them to set even moreaggressive asking lease rates and incentives to entice new tenants," CBRE points out.

The CBRE report cites one short sale that already has taken place in the Folsom submarket at 80 Iron Point Rd. The 65,000-square-foot class B building sold for $97.31 per square foot, compared with the $200 to $260 per square foot that class B buildings in Folsom typically command. The short sale eventually led to Benefit Risk Management Services signing a long-term lease for 30,000 square feet with what CBRE calls "enormous incentives."

Both CBRE and Grubb & Ellis cite a rising vacancy rate in Sacramento in the second quarter, with Grubb & Ellis calculating it at 19.5% and CBRE figuring it at just a shade under 21%. Grubb & Ellis says the second-quarter rate represents an increase of eight-tenths of a percentage point, while CBRE points to a 1.3% increase in the vacancy.

Grubb & Ellis, in its forecast, says that "extend and blend" will become "the tenant mantra for the remainder of 2009." Tenants will continue to negotiate substantial free rent periods on new leases, rather than discounted contract rates, the Santa Ana-based company says. This will result in a measurable decrease in regional effective rates compared to last year, it says.