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As seen in
June 30, 1999
Tenants Must Adapt to Market Changes
by TIM KUCHA,
PLYMOUTH PARTNERS, LTD.
 In
the first half of the calendar year, companies in the market
for office space had to be counseled to act quickly to secure
a potential site. Tenants did not have the luxury of taking
their time in the negotiation process for fear that another
party may enter discussion with the landlord and knock them
out of the deal with a better offer.
By fast-tracking the entire negotiation process, it "allows"
the landlord to have a "take it or leave it attitude"
toward a prospective tenant. With a tightening market, landlords
know it will take no time for them to find a prospective tenant.
Most tenants these days are more concerned, and should be, about
securing the "right" space rather than losing time
and jeopardizing the deal by trying to gain extra concessions
or work allowances.
It is of utmost importance then, that a tenant pursues a site
aggressively after evaluating that it meets most of its criteria.
As well, tenants who have been in the market for over 12 months
will have noticed a sharp increase in rents. For example, if
a tenant went back to a site they viewed six months ago, chances
are that it will no longer be available. And if it is still
available, they will notice an increase in the landlord's original
asking price at least several dollars per square foot, and with
less or no free rent being offered.
Tenants Will Face Rigid Obstacles Throughout the Year As the
market continues to tighten, and it will, tenants will have
fewer available options and more rigid obstacles to overcome.
With almost no new construction underway in the New York market,
coupled with landlords offering very little work allowance and
almost no free rent, what is the tenant to do?
If tenants are to avoid having to go out-of-pocket for space
improvements, it is imperative to seek various options for lease-held
improvements, also known as tenant improvements. Asset secured
financing provides an avenue for tenants to make the necessary
improvements in a new commercial space. The tenant pays for
these improvements over a longer period of time with fixed monthly
payments.
Another strategy is for a tenant to restructure their current
lease as long as the existing space is suitable to the tenant's
needs in the years to come. The advantages of negotiating an
extension or renewal well in advance of the lease's expiration
is that the tenant will not have any disruption of business
and not have to incur any moving costs. An added consideration
is the tenant will not have to worry about another tenant in
the building looking to expand into their space. The tenant
should be able to achieve a favorable rent or gain some types
of concessions, since the landlord will not have to incur out-of-pocket
expenses usually associated with attracting a new tenant.
With a strong economy, most companies are experiencing growth.
One of the most common problems confronting a tenant is lack
of expansion space in their current building. Class A rents
have climbed to between $50 to $65 per sq. ft.. Companies in
these buildings are considering downgrading to Class B buildings
where they can double their square footage and still pay the
same amount of rent.
The average asking rents for Class B buildings have increased
by 8 percent in the last six months. Many old Class B buildings
are undergoing extensive renovations, and the landlords are
repositioning them to attract new media/creative tenants. It
is not uncommon to see high-profile companies moving into buildings
or districts that they would never have considered several years
ago.
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