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WHERE DO YOU STAND ON CONCESSIONS?

Last week’s national GlobeSt.com poll addressed the sometimes-controversial issue of where landlords stand on concessions. By the end of the week 43% of respondents said they were standing pat, but that it was getting tough to do so. 38% of respondents admitted that tenants had them right where they wanted, while 19% answered that they did not need concessions. Larry Richey, a senior managing director for the state of Florida with Cushman & Wakefield, spoke with GlobeSt.com to help readers get a sense of what the office market in the state of Florida is now experience in terms of concessions.

“With rapidly increasing vacancy rates across the state, from 10.6% at the end of 2006 to 14.3% at the end of the first quarter of 2008, concessions are beginning to be much more prevalent. A great deal of sublease space has been placed on the market and there’s as much as three million square feet of shadow space statewide. For landlords to be competitive with sublease space, concessions are becoming necessary. Of course, this varies by MSA and submarkets within any MSA.

“We have never seen the pendulum swing so fast from a landlord’s market to a market that’s beginning to favor the tenants. Some landlords still choose not to accept the reality, but as the year unfolds I think more and more will find it necessary to be more competitive. Landlords are trying to hold the line on their asking rates, and clearly prefer to offer more tenant improvement dollars over other concessions. However, depending on the specifics of the lease, it is now common to see free rent offered, primarily outside of a lease term.

“The state of Florida has eight and a half million sf of office space under construction right now. Unless we have significant positive absorption by the end of the year, vacancy rates are going to increase significantly. When vacancy rates increase the way they have, and it appears they will continue, either lower face rates or concessions will be the norm. We’ve been through these cycles many times in the past, and based on current data we’re trending towards a tenants’ market.

“During the first quarter of 2008, every major Florida market, including Miami, Fort Lauderdale, Palm Beach, Orlando, Tampa, Jacksonville, Fort Meyers and Naples, had significant negative absorption. Overall in the state there was 2.7 million sf of negative absorption. This is only one quarter, but you can’t ignore that type of space being vacated, coupled with eight and a half million sf under construction. We need to see a return of demand. Unless we start getting some major increase in employment, we’re going to continue in this pattern.

“Because housing costs are declining, we have a great availability of labor and we are seeing many more big projects looking at Florida than we’ve seen in recent years. With a little good fortune we could see a lot more increase in demand, which will mitigate the increase in concessions.”

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