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ISELIN, NJ-With leasing activity at a near standstill and rents stagnating, landlords are increasingly using concessions to retain and attract tenants to class A office buildings. A recent study by Studley found that the value of concession packages offered by New Jersey landlords to keep and retain tenants skyrocketed by 42.9% to $50 last year from $35 in 2007.

Among the findings in the Studley Effective Rent Index 2009 New Jersey report was a 20% drop in landlord effective rent, which is an estimate of rent received from a tenant, less related expenses, to $10.05 a square foot. Total rent rose a modest 1% to $33, but net rent fell 1.4% to $19.80.

Between 2007 and 2008, operating expenses increased 5.1% to $8.32 a foot, while real estate taxes jumped 6.9% to $3.25 and electrical costs went up by 0.6% to $1.63. During the same period, tenant effective rent declined by 6.8% to $25.60. Tenant effective rent estimates the actual of occupancy cost for the tenant by calculating the total rent minus lease concessions, which are amortized over a 10-year period, using a 10% interest rate and beginning-of-period payments.

Philip Lipper, senior managing director at Studley’s office here, tells GlobeSt.com that landlords are reluctant to reduce rents–which haven’t risen much in recent years–and are therefore turning to concessions. “They don’t want to be doing deals that are going to further denigrate the rental stream that the building can get in the future,” he states. “That is one of the reasons they’ve gotten very aggressive with incentives.”

Generous tenant improvement packages are the most popular bait. Lipper relates that in some cases, TI dollars have gone above $50 a square foot, an extreme rate occurrence a few years ago in the state. It’s all a function of landlords desperate to keep and/or attract tenants coupled with tenants wanting to spend as little money as possible on their digs.

“Even tenants that are growing and have strong businesses don’t want to spend a ton of capital to build out spaces,” Lipper says. “So the cash contribution that a landlord puts toward [TI] work is more important than ever because tenants don’t want to go out of pocket for $20 to $30 a foot to build out the space.”

With little movement in the market, renewals dominate leasing activity these days. “If you’re a tenant faced with a lease expiration, it’s a lot easier and less expensive to renew,” Lipper points out.

From the landlord’s viewpoint, it makes more sense to keep their office space occupied with an existing tenant. “Historically, it used to be that a landlord would be much more aggressive to get a new tenant,” Lipper says. “But in this economy, landlords don’t want to lose the tenants that they have. Because there is so little movement in the marketplace, nobody can safely say, ‘If tenant XYZ moves out, three months later I’ll have the space leased to someone else.’ People are afraid of vacancy, which can really hurt you today. The vacancy can be there for a long time now.”

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