The year 2008 will be year of uncertainty in the office market nationwide. The speculative buying of commercial real estate over the last several years has pushed office market rental increases in double digits in many urban markets. Now with a possible slow down in the economy, landlords are feeling uneasy as to whether they can achieve their projected rental rates while tenants that need office space this year are entering a market where vacancy rates are low and therefore alternatives are harder to come by in these same markets.
Unlike the dot com market and its eventual bust this current office market will not see a fast raise of office space availability due to large failures of business. Although a recession could create some vacancies, the reality is that current low vacancies in a number of our markets are based more on the lack of building of office space going back over twenty years in some markets.
Some markets such as San Francisco have started building new office space for the first time since the mid 1980’s. With over three million square feet of projected office space being built in the city this could open up real opportunities for lower rental rates in the future for office tenants if this new space cannot be absorbed quickly.
So what is an office tenant to do in 2008? First, an office tenant in a tight office market needs to be able to react quickly if they find a space that works for them. Competition particularly for smaller spaces does exist and if tenants are not able to present an offer, with all the necessary financials required for a landlord to make an informed decision, they could get beat out of that space. Second, tenants have been accepting that the perfect space may not exist in today’s market. If for instance views of the bay are required you may not find it. Don’t make the mistake of not pulling the trigger on a space that could work because it is not 100 percent ideal. You need to be willing to accept less.
Third, be prepared to open your checkbook to cover overages in tenant improvements and security deposits that may be higher than the one month you put up for the last year. Tenant improvement costs continue to skyrocket and landlord allowances are not covering full build outs today. If the market does soften new owners of buildings may have trouble funding these shortfalls in tenant improvements, so be prepared to have to finance these improvements outside of the lease rate. Also, because of higher tenant improvements a number of buildings are requiring more than a month’s security deposits. Get ready for that as well.
One suggestion is to work with your bank early in your office space search to secure the necessary financing ahead of time to cover tenant improvements and security deposits.
Not all banks are aggressive in providing these types of loans; therefore, check out the smaller community banks as well as banks that are aggressively growing now. US Bank for instance is actively promoting loans to cover these types of needs.
Fourth, have you attorney on board. Make sure that you ask for a copy of the lease early even if it is not filled out so that your attorney can review these leases ahead of time. This will allow your attorney to advise you as to the fairness of the lease and what they anticipate will be the hours necessary to review and negotiate these leases. Remember in a tight market landlords are not anxious to spend a lot of money on lease review. Make sure that your attorney avoids rewriting landlord leases. It only means to raise legal costs for both sides while also leading to the possibility that another tenant could step in and take that space from you.
Finally ask your broker to investigate buildings that have not changed hands in the last three years. This is where you might find the best deals. Established owners, particularly those that survived the last boom and bust dot com market, understand that locking in good tenants at a fair market rate rather then a speculative one will provide stability for their asset vs. the new owner that has to find ways to get their building to perform to their original pro forma. |
