Tenants See Rents Inch Up, Act Accordingly

NEW YORK CITY-The past two years have seen an evolution in the strategy office tenants are following, leasing veteran Andrew Roos tells GlobeSt.com. Where the choppy seas of post-September 2008 found office users throwing the deck chairs overboard to keep the ship afloat, today they’re focused more decisively on the long term. One of those decision points is to take advantage of leasing deals while they’re still available.

Following the capital markets crisis, “there were tremendous opportunities to be had,” says Roos, principal and vice chairman of the New York tri-state operations of Colliers International. “In a recessionary period or a period of fear, the first thing companies do is cut expenses, cut jobs. Financial firms and large multinational companies literally walked away from space,” often determining simultaneously that it was cheaper to leave expensive improvements behind.

That created opportunities for tenants “that we were able to take advantage of—fabulous real estate deals,” he says. “But beyond that, we could also unlock significant value by finding turnkey solutions where we could actually move in, take advantage of the furniture, fixtures and IT” that were left in place. 

Fast forward to 2011, and it’s clear the climate has changed. With the market stabilizing, “you’re starting to see prices creep up and erosion in concession packages,” Roos says. “And the landlords, particularly the REITs, are becoming more bullish. Having said that, if you’ve got a strong tenant that is in a position to take advantage of the market, there are still opportunities to consider.”

Another phenomenon Roos is seeing: “There are a number of lease rollovers coming in 2012 and 2013, and normally that would be too far in the future, but landlords and tenants are recognizing that rents are firming. When you go to the grocery or the gas station, things cost more. And there’s a general feeling that this eventually will hit real estate. It’s already started to.”

In the meantime, Roos says that with some of his large clients, such as a major accounting firm, “we’re finding a number of landlords that are still willing to be competitive. A decision many tenants will face next year is: if you believe that inflation will creep into the real estate market, do you wait and try to renew later, or do you take advantage of what you believe is a cheaper market now and amortize additional free rent if necessary to take care of the overlap? Many tenants have come to the conclusion that if rents are going to rise, then they’re better off acting now.”

Asked whether forward-looking tenants are planning to accommodate future growth or maximizing their utilization of existing space, Roos says they’re doing both. “In recessionary times, tenants typically find more efficient ways to occupy space,” he says. “At the same time, they’re looking to maximize revenues, and that leads to job growth. While job growth in most markets in the US has been relatively flat, we’re starting to see job creation in the New York area.”

His accounting-firm client, for example, is currently faced with two occupancy scenarios: “to take expensive space but less of it, and handle their growth in the adjoining suburban markets of Westchester County or Long Island, or take less expensive space in New York City and plan for that growth here. Do they take 70,000 square feet of expensive space along Park Avenue north of 42nd Street, or 100,000 square feet in a somewhat less sexy location? If I were a betting man, I’d say they’ll take that larger space, because they’re planning to expand.”

Roos’ commercial real estate career beginning in 1976, just as the New York City market was recovering from one of its most painful downturns, and so this is hardly his first cycle. “History generally repeats itself,” he says. “Real estate goes through periods of growth and recession. The growth at the peak of this cycle was abnormally high, and it took longer to recover this time, but all the signs are there.”