Both Sides of the Balance Sheet

LOS ANGELES-Many predictions see the commercial office market finally tightening by 2012. Nobody has a crystal ball for today’s global economy but the balance may be slowly shifting towards landlords. In recent months, lenders have been more willing to work with landlords to restructure existing debt and the office market appears to be recovering.

Will the market be fully covered by 2012? I would say yes in certain traditionally strong markets, such as the Century City submarket of Los Angeles, Midtown Manhattan and possibly Washington D.C., but not until late 2012. In other significant markets—including Downtown Los Angeles, Chicago and Dallas—the recovery will probably be delayed until mid 2013 or mid 2014. 

The implications of this long-delayed turnaround are far-reaching. Tenants that are able to correctly project the market’s path and develop the appropriate strategies will be primed for success as the office economy turns. But to successfully navigate today’s landscape, it is important to analyze the priorities of both landlords and tenants and understand that savvy partnerships can nurture mutually beneficial scenarios. To most effectively leverage today’s favorable market, there are several strategies that our Tenant Advisory team encourages.

First, it is important to note that most well-capitalized, sophisticated institutional landlords are looking to “blend and extend” good-credit tenants at least two-to-three years in advance of lease expirations. “Blend and extend” refers to a strategy in which tenants enter early lease renewal negotiations in exchange for landlord concessions. Ultimately, landlords know that even with possible downsizing, a quality credit tenant, who may expand at a later date, is a good bet in today’s uncertain office market.

In today's market, early restructures are obtainable for good credit tenants and sophisticated landlords. Recently, I represented the boutique commercial litigation law firm Baute + Tidus to restructure its existing lease of approximately 12,000 square feet. In exchange for a longer term, we began negotiations with Maguire Properties Group (MPG) a year-and-a-half early to lock in lower market rents and concessions on the 49^th floor at 777 Tower in Downtown Los Angeles.
It’s also important for tenants to align with their landlords to negotiate tenant improvements and free rent as part of a lease deal. Many landlords today are willing to offer free or reduced rent in exchange for decreased tenant improvements, increased access to financial reports or higher security deposits. At the same time, to ensure long-term stability of funds, tenants may ask landlords to set aside escrow funds for future tenant improvements. In most cases, both sides are willing to compromise, ensuring long-term leasing revenue for the landlord and lower term rates for the tenant. These are win-win scenarios for both groups.

Finally, to most effectively leverage today’s market, savvy tenants will also seek unique marketing opportunities, which can significantly increase the value of a lease without damaging your budget. Traditionally, anchor tenants who command 10% to 20% of a building’s occupancy are optioned building top signage, building naming rights, monument signage, plazas or courtyards named after tenant, shuttles with tenant’s logo and other creative naming rights. Today, large tenants have shrunk, allowing credit tenants who occupy perhaps 5% to 10% of a building to solicit these benefits from landlords. It is important for tenants of any size to remember that a softer market can present fantastic opportunities for out-of-the-box deal-making and cost saving.

No matter when the market swings back in the landlords’ favor, tenants and landlords will need to continue to work closely in tough times until the economy improves. An equilibrium market of 7% vacancy is good for all parties.

The views expressed in this column are those of the author and not necessarily GlobeSt.com.

Jonathan Larsen is executive managing director for Transwestern’s West Region. Based in Los Angeles, he oversees the region’s Tenant Advisory Services. He can be reached at jonathan.larsen@transwestern.net or (213)430-2530.