Cornering the Renter's Market How to take advantage of the office-space glut--before the deals dry up.
(Business 2.0) – One of the few good things about the sluggish economy has been the ability to rent prime office space on the cheap. But with the recovery gathering steam, your chance to cash in on the weakest market in more than a decade is slipping away fast. The National Association of Realtors is already reporting signs of a rebound and predicts that rents will begin climbing next year. Businesses snapped up 27 million square feet of office space in 2003, the first time since 2000 that more space was let than came onto the market. So whether you're looking to cut the size of your monthly rent check or just want to get more for your money, here's how to lock in a great deal while you still can. -- BRIAN CAULFIELD
HOW TO PAY LESS
Vacancy rates are inching down, but you'll still find plenty of jittery landlords with space to fill. Take advantage by redoing your current lease, entering into a new one, or subleasing from a business that overextended during the boom.
Obviously the simplest option is to get your landlord to adjust your lease. Not only will this mean lower monthly payments, but you'll save the cost and hassle of having to move. Unfortunately, you don't have much leverage, especially if you have shaky credit or a long term left on your lease. The most effective gambit is an offer to "blend and extend," in which you agree to re-up in exchange for lower rent, "blending" the new lease with the old at a reduced rate.
>> STARTING FROM SCRATCH
Much like cellular carriers, landlords often give better deals to new customers than to existing ones. In some markets, six months of free rent on a 10-year lease is typical, especially if you're willing to pay for property improvements yourself. Brokers warn, though, that such free-rent offers will quickly disappear as vacancy rates get back to normal. Still, for the next couple of years, you should be able to find a landlord willing to give inducements like fancy upgrades and flexible leases.
Previous busts were fueled by too much construction, but this time it's businesses, not developers, that are stuck with empty space. The result, says Jim Costello, a senior economist with Torto Wheaton Research, is that you'll now find the sweetest deals by subleasing: You can pay as little as 40 percent of the market price for space that's already outfitted with basics like phones and desks. The catch? You'll get the best rates on leases that have only another year or two to run.
HOW TO GET MORE
Hoping to pay today's low rates for as long as possible? Looking for a deal that'll let you expand or downsize without incurring a major hit? Or seeking a space that's been tailored to your needs? Here's how to get what you're after.
Locking in a 10-year-plus lease term isn't as easy as it sounds. Landlords in San Francisco, for example, are still smarting from the long-term deals they signed in the early '90s, which left them with nothing to cash in on during the boom. The trick may be to pit prospective landlords against one another: Find one who's willing to go long and use it as leverage with others. If that fails, try offering a compromise--perhaps a lease that guarantees your rates for the first five years and then adjusts for the remainder of the term.
If you see growth (or the opposite) in your company's future, don't worry about cut-rate rent: Flexibility is what you need. To secure room for expansion, ask your landlord for the right of first refusal on any available space in your building. Make sure to spell out how you'll set the price; you won't get a firm number, but you can probably get your landlord to agree to a "fair market price"--and to allow a third party to help set it. If you're more likely to get smaller than bigger, reserve the right to sublet your space or to terminate the lease for a reasonable fee.
Landlords who once pitted prospective tenants against one another in bidding wars for dilapidated space are now willing to spruce things up if it means signing you to a lease. Mike Moran, a broker in Burlingame, Calif., says one landlord he recently worked with spent $50 per square foot to land a new tenant, installing everything from a new electrical system to custom floor plans. Deals like that are getting scarcer, Moran says. But in most parts of the country (see "Know Your Market," reverse), you should still be able to get $10 to $15 per square foot in upgrades.
KNOW YOUR MARKET
Commercial real estate won't bounce back evenly across the country. To understand your market, there are three metrics you need to know: the vacancy rate, price per square foot for Class A downtown space, and absorption--the difference between the amount of space that was let during the past year and the amount that came onto the market (the higher the number, the worse for you). Here's a current snapshot of nine major cities.
2003 VACANCY RATE: 13.9% (CHANGE FROM 2002: +0.3%) CLASS A RENT: $22.20/SQ. FT. (-6%) ABSORPTION: 240,000 SQ. FT. Slow growth is the outlook here. Suburban landlords were hit particularly hard during the downturn. But with little real estate coming to market that hasn't already been let, vacancy rates should move lower.
2003 VACANCY RATE: 17.4% (+1.2%) CLASS A RENT: $38.40/SQ. FT. (-12%) ABSORPTION: 368,000 SQ. FT. Move fast. Rents have fallen nearly 50 percent since their 2000 peak, but the market is starting to bounce back. Brokers are advising clients to lock in long-term leases--and renegotiate existing ones--before the end of the year.
2003 VACANCY RATE: 16.9% (+0.3%) CLASS A RENT: $32.00/SQ. FT. (0%) ABSORPTION: -945,000 SQ. FT. There's plenty of prime downtown space to sublease, going for about half the market rate. And with several large new buildings under construction, rents likely won't be rising anytime soon.
2003 VACANCY RATE: 28.1% (+1.8%) CLASS A RENT: $18.50/SQ. FT. (-3%) ABSORPTION: -691,000 SQ. FT. Dallas has one of the highest vacancy rates in the country, so you'll have no problem securing space here. New tenants will find landlords offering generous enticements. Existing ones will find landlords eager to renegotiate current leases.
>> LOS ANGELES
2003 VACANCY RATE: 19.8% (+0.3%) CLASS A RENT: $24.20/SQ. FT. (+1%) ABSORPTION: -86,000 SQ. FT. Office construction has slowed considerably, with less than a million square feet of new space currently under construction. This should drive down the vacancy rate and lead to rising rents by the middle of the year--especially in the suburbs, where vacancies jumped more than 40 percent during the downturn.
>> NEW YORK
2003 VACANCY RATE: 14.2% (-0.2%) CLASS A RENT: $33.90/SQ. FT. (-7%) ABSORPTION: 446,000 SQ. FT. Terrorist attacks, Wall Street upheaval--nothing seems to faze this market. But with lots of new space being added downtown and in midtown, look for prices to remain flat or even dip slightly in the short term.
>> SAN FRANCISCO
2003 VACANCY RATE: 16.9% (0%) CLASS A RENT: $29.10/SQ. FT. (-9%) ABSORPTION: 138,000 SQ. FT. Wiped out by the dotcom bust, this market is finally seeing some lift. The vacancy rate edged down in the second half of 2003, and modest growth in local business should push it below 13 percent by 2006.
>> SAN JOSE-SILICON VALLEY
2003 VACANCY RATE: 20.3% (+7.1%) CLASS A RENT: $32.70/SQ. FT. (-17%) ABSORPTION: -77,000 SQ. FT. This market will be hurting for at least the next year, which means you can land ridiculously good deals. Some ailing tech firms will hand over extra space to anyone who'll pay the maintenance costs, while brokers are offering a year's free rent on a seven-year lease.
2003 VACANCY RATE: 7.8% (+0.5%) CLASS A RENT: $41.90/SQ. FT. (-9%) ABSORPTION: 1,915,000 SQ. FT. Government spending has kept the Beltway strong throughout the downturn, but businesses in this pricey market can expect a bit of relief as 6 million square feet of new space becomes available in the next two to three years.
Note: Numbers in parentheses represent year-over-year change. Sources: Colliers International; brokers; news reports