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This is Part I of a two-part series.

[IMGCAP(1)]NEW YORK CITY-According to the 2008 Studley Effective Rent Index Report, the average national concession package rose for the first time since 2003 and insiders agree that concessions are rising. The report found that the average concession package for 2007 was $60.28 per sf, a 7.4% increase from 2006. The report also found that in 2007, average national tenant effective rents, the estimated cost of occupancy, which includes concessions, also increased from 2006 by 23.4% to $55.20 per sf–a probable peak in light of the current economic climate.

Bradley Kaufman, a partner and leasing specialist in the real estate group at locally based law firm Pryor Cashman LLP, tells GlobeSt.com that he is noticing a rise in owner concessions noting that it is directly affected by leasing slowdowns. Kaufman tells GlobeSt.com that concession packages not only affect newcomers to buildings, but they involve existing tenants as well. “It affects everyone in the marketplace.” The intention of offering packages is clearly to help lure cautious tenants who might otherwise wait to commit to space, he says, but “whether it works or not depends on where the market is headed.”

[IMGCAP(2)]Benjamin Kursman, a partner with New York City-based law firm Herrick, Feinstein LLP, where he is a member of the real estate practice group with a sub-specialty in leasing, tells GlobeSt.com that while he hasn’t done a scientific survey, he has noticed a rise as well. “I do believe it is resulting from a slowdown in leasing activity.” He explains that he does not necessarily think concessions always help entice tenants. “I have heard from brokers that there are prospective tenants who want space now, but in spite of the concessions they have been offered, they believe that rents will eventually fall and are waiting-out the landlords.” Kursman says that from the anecdotal evidence he has seen, he does believe that there has been a softening in the marketplace.

[IMGCAP(3)]Deborah Jackson, executive managing director of locally based Weiser Realty Advisors, tells GlobeSt.com that when there is an increase in concessions within the office sector, it is typically due to a number of factors. The factors she notes include: increase in local unemployment–and related reduction in space requirements; increase in inventory in the area, such as availability of large amounts of new space; and nature of the local availability. Sometimes the space that is available is of inferior quality and location and requires higher concessions to lease.

Jackson notes that there is definitely a correlation between vacancy and concessions. “I believe that certain markets are weaker than others,” she explains. “With that said, when markets become weakened, typically landlords are going to give free rent more than allowances.” She further notes that this does not require an upfront cash outlay. “We are seeing this in certain markets, but they are also the markets that have been struggling with high vacancy for some time.”

[IMGCAP(4)]Ken McCarthy, managing director of Cushman & Wakefield’s New York area research tells GlobeSt.com that as far as owner concessions rising–although he notes that he doesn’t have hard numbers—he says that “our brokers tell us that when they talk to landlords, they find that the landlords are more amenable to making deals and are therefore more willing to provide more incentives to do that. …”With slower [leasing] activity, landlords become more flexible to lock in tenants.”

[IMGCAP(5)]Concession packages changed in tandem with the shifting balance of supply and demand in respective markets, the Studley report says. Steve Coutts, Studley’s SVP of National Research Services explains that the company’s report findings are the “initial signs of a softening in the marketplace.” Coutts explains that “given the current economic uncertainty, we expect tenant effective rent to decline in more markets next year and concessions to continue to grow.” He notes that in the most oversupplied markets, owners must compete for tenants in part through increased concession packages. “Even in tight markets, landlords are offering slightly larger concession packages to lure cautious tenants who might otherwise wait to commit to space.”

[IMGCAP(6)]Lisa Kiell, managing director of Jones Lang LaSalle, tells GlobeSt.com that as far as the New York City market goes, owner concessions are just the reality of the situation when there is space on the market. “There is definitely more pressure on building owners to get deals done,” she says. “Landlords are looking to throw a bit more at prospective tenants. They are doing it with concessions to try and keep the face rents up. Building owners are focused on keeping face rents up when there is some softening in the market.”

Kiell predicts that the situation in the New York City office market will continue where it currently is, at least until the end of the year. “The bottom-line is that good space gets leased. There has not been that much [square footage] put on the market and the blocks that are on the market are nice spaces in good buildings,” she says. “If you are a tenant trying to sublease excess space, you try to give up the attractive space because there is greater demand for it.”

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