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CHICAGO-Office rents that dropped $1 per square foot here and declined in markets throughout the US in the latest quarter have everyone talking about concessions. Chicago’s roughly $1 per square foot per year drop in the first quarter, reported in the latest Grubb & Ellis survey, by no means make the city stand out as a center of declining rents. Rates dropped by $1.14 per square foot per year in February alone in Downtown Manhattan, according to a CB Richard Elllis report, and the quarterly market reports coming in from around the country pretty much show the same trend, with varying percentage declines in asking rents. On the West Coast, Orange County’s rents have dropped by 36 cents per square foot per month to an average of $2.37 in the first quarter, down from the record high rate of $2.77 that was established in the fourth quarter of 2008, and rates have been declining since.

One of the upshots of all of the declining asking rents, of course, is that concessions are on the rise, reducing effective rents even below the asking levels. Depending on the specific geographic market and the landlord, concessions continue to increase in the forms of free rent, sometimes up to six months in some places, along with reduced parking fees, relocation funds and tenant improvement allowances. In fact, the trend toward greater concessions was already evident last year, when CBRE pointed out in its fourth-quarter report for the Los Angeles office market that one of the results of the downturn was an increase in tenant concessions in L.A.

Tenant improvements may eventually become a troublesome issue for landlords, according to a recent Rreef research report, which pointed out that if rents slide far enough, it just doesn’t make economic sense for building owners to offer tenant improvements along with those lower rents and other concessions. In addition, Rreef and others point out, some landlords may simply run out of funds for tenant improvements if they haven’t already.

As in previous times when markets have turned in favor of tenants, landlords are willing to grant the concessions to maintain the face rates of rents or simply in order to do the deals, according to brokerage sources and quarterly research reports. In addition, the terms of landlords’ loans often state that rents are not permitted to fall below certain levels, so the concessions are a means of keeping the stated rents in line with loan terms. Also as in previous times, brokers are advising tenants that now is a good time to lock in favorable rates and to execute deals that will not be available when the rebound eventually arrives.

Along with the typical concessions like free rent and free or reduced parking, some tenants are finding that the downturn is reducing or eliminating their need for significant tenant improvements because some of the space that’s available is already built out in a way that suits their needs. Financial services firms and law firms, for example, can sometimes find direct or sublease space that is already built out for such uses, for example. How long the concessions will last and how generous they will become remains to be seen. A number of forecasters say that the market has not hit bottom yet, which could mean concessions for some time to come.

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