Tenants driving concessions, for now
With vacancy rates at their highest in years, many building owners and facility executives have found themselves forced to offer more deals to attract and retain tenants.
“Owners are desperate to make deals,” says Jack Sanders, vice president of corporate services at Paine/Wetzel ONCOR International in Chicago. “There is a small supply of companies looking for space.”
In the current market, increased tenant improvements (TIs) are common, but other options — such as free rent for a certain time period — can sometimes be more attractive to owners as well as tenants. Dave Morris, vice president and principal at Colliers Turley Martin Tucker in St. Louis, says that TIs are not as common because construction costs are high in his area, but when they’re called for the owner is hit twice.
“The owner is paying more money for lower lease rates as a result of current conditions,” says Morris.
What’s more, TIs require that tenants have good credit and a longer-term lease, says Bob Gibbons, the vice president and regional manager of CMD Realty in Dallas. The problem, he says, is that many tenants can’t predict where their business is going. Because of this uncertainty, they cannot meet the requirements for TIs. Instead of TIs, owners are often cutting deals on a shorter lease with a lower rent.
Owners are also having to offer concessions just to compete with discounted sublease space that has recently begun to flood the market, says Steve Mulhern, vice president and regional manager for CMD Realty in Denver.
To retain tenants, landlords are also providing incentives, such as tenant-appreciation days, picnics or baseball games. “More landlords are going out of their way to keep tenants,” says Jack Althoff, president of CommServ Ltd. in Chicago. Economics explains why: It costs less to retain tenants than to attract new ones.
Most sources don’t expect the current cycle to change until the end of next year.
“We probably have a couple more years before we hit equilibrium, where neither the landlord nor tenant has a disproportionate advantage,” says Mulhern.
— by Laura Bayard, editorial intern
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