LOS ANGELES-Building owners in all property sectors are granting concessions packages tailored to keeping tenants in their buildings as vacancies rise, demand declines and competition from sublease space increases. As a new office report from Grubb & Ellis points out, second-quarter asking rates decreased only slightly in Los Angeles as vacancies hit a five-year high, but effective rents “dropped considerably due to landlord concessions.”
The concessions include the standard types of incentives offered by building owners, such as free rent, free or reduced parking costs and tenant improvement allowances, but they also include a number of other incentives that are unusual if not unique in some cases. In one industrial lease in Orange County, for example, the landlord has agreed to a gross rent rather than the typical triple-net deal and has also agreed to take care of landscaping and certain other maintenance items that are often the responsibility of the tenant.
Such deals illustrate how the world of concessions today differs from that of the recession of the early 1990s. Chris DuMont, a managing director in the Downtown L.A. office of Colliers who specializes in West L.A. markets, says that in the recession of the early 1990s, West L.A. building owners would often agree to a certain amount of free rent–often one month–for every year of a lease. Now, DuMont says, there is no such formula, so each transaction carries its own unique set of terms.
Reports from all of the major brokerages mention concessions as a major strategy that building owners are employing to try to keep their properties occupied. “Landlords are pouring on theincentives to lure new tenants and are getting creative in their efforts to keep existingtenants,” the Grubb & Ellis second-quarter report states. CBRE points out that concessions are being offered not only for new leases but for renewals and for lease extensions as building owners focus on tenant retention.
A new report by Studley cites generous concessions as one of the trends in an L.A. office market where leasing approached record lows and asking rents continued sinking in the second quarter. As landlords look to retain and attract creditworthy tenants, they are offering highly competitive terms, including generous concession packages (free rent, improvement allowances, and parking concessions) that average $60 to $110 per square foot for five- to 10-year leases in class A properties, said Mike Catalano, managing partner of Studley’s West Los Angeles office. Towers Perrin Forster & Crosby Inc., for example, which recently renewed for five years at 1925 Century Park East, cited strong incentives granted by the landlord and significant savings on moving and build-out costs as the primary reasons for its decision.
At Voit Real Estate Services in Orange County, VP and chief of research Jerry Holdner expects concessions continuing to increase in the office market in the forms of free rent, reduced parking fees, relocation funds and tenant improvement allowances. Holdner also expects those same concessions to prevail in the Inland Empire industrial market, which was one of the most robust for years until the recession weakened demand. Senior associate Stefan Rogers of Voit points out that since tenant retention is a key to sustaining values, landlords today are more likely than ever to renegotiate leases early because available spaces can easily sit vacant right now for up to 18 months. Available concessions include several months of free rent, moving allowances, turn-key tenant improvement allowances and significantly discounted rental rates compared with 18 months ago, he adds.
In Los Angeles, a report from Studley points out that landlords are competing with sublease space at the same time the demand for space is dwindling. “Tenant rosters are now more critical than ever, since landlords’ ability to refinance or sell a property may be tied to the retention of one or two key tenants,” the Studley report states.