(FORTUNE Magazine) – NEED MORE office space? Need lots more? You've had your eye on a posh new building? A high floor, perhaps? And you've always wondered what it would be like to have a corner office the size of a basketball court? You're in luck. The most severe and widespread glut of U.S. office space since World War II is yielding tenants some of the sweetest deals in decades. On a five-year lease in Houston you can get two years of free rent. In Dallas, Denver, and Los Angeles, a year to 18 months is on the house. You can even get six months free in a splendid Manhattan tower designed by Philip Johnson and John Burgee and built by Gerald D. Hines, a developer celebrated for the quality of his buildings. And you can get more. The landlord may well be willing to spend more than his normal outlay on office decoration. He might defray the cost of moving or perhaps take over your old lease. If you're a big tenant, he may even give you equity in the building. For free. Landlords are that desperate for tenants because the vacancy rate in U.S. downtown areas has soared from around 5% four years ago to a towering 16.5% in December, according to the 33-city survey of Coldwell Banker, the real estate arm of the Sears Financial Network. Because ordinary turnover always creates some vacancies, a vacancy rate of 5% probably represents full occupancy. But office vacancy rates across the U.S. are far higher. The average in the suburbs is 22%. The hardest-hit localities, mostly in the Sunbelt, show even higher rates. At the end of 1985, suburban Houston had a vacancy rate of 31%; downtown Miami, 19.5%; San Diego, 23.4%; Denver, 26%; Fort Lauderdale, 29.4%. Unoccupied space in downtown Los Angeles amounted to 13.5% on September 30, and in the following three months rose to 18.2% as giant new buildings opened with few tenants. Vacancy in metropolitan Dallas was well over 20% at the end of 1985 and, according to local real estate experts, may hit 30% by the end of this year after a new crop of buildings comes to market. In such a lopsided buyers' market, tenants are finding that no rules apply and that only human ingenuity limits the kind of deals they can cut. In downtown Los Angeles, for example, a landlord offered an advertising agency a $250,000 condominium apartment as an inducement to sign a ten-year lease. Another developer offered the president of a prospective tenant company a slip in a nearby marina; the executive refused the offer because he thought it wouldn't look right. The most commonly extracted concessions have been around a long time: free rent and extra expenditures on improvements, such as partitions, carpets, and wall coverings. But in today's market landlords will often concede a lot more. Consider, for example, the signing bonus. Last November, Kirkland & Ellis, a prominent Chicago law firm, moved its Colorado operation into two upper floors of a handsome new building at 1999 Broadway in downtown Denver. The firm made ! the deal when the building's developer apparently needed to sign up another prestigious tenant (he already had U.S. West) to help him complete his financing. Kirkland & Ellis took 31,000 square feet for ten years at a nominal annual rent of $713,000, or $23 a square foot. That figure is in line with rents landlords are asking in Denver and appears to be no bargain. The deal, however, gives the firm 12 months of free rent and plusher than usual office decoration, provides for the developer to assume the firm's old lease, and includes a cash bonus of $2.4 million. The bonus was paid at the deal's closing, before Kirkland & Ellis even moved in and began not paying rent. Adding the earnings on the bonus to the value of the other concessions it got, the firm figures that over the next ten years its new quarters won't cost it anything. The signing bonus sometimes takes strange forms. Richard Dunn, who runs the Charles Dunn & Co. real estate brokerage in Los Angeles, describes a lease he handled for a local law firm that included free rent and greater than usual expenditures on office decoration. Then, Dunn says, as ''a final kicker, the partners got a check for $190,000 -- to them, not to the firm.'' What difference did that make, since the firm is a partnership? Dunn explains that it was only the senior partners who got the check; their junior brethren were frozen out. With so many concessions available, prospective renters need to be nimble and audacious. Broker James Binns, also of the Dunn agency, was surprised last year at how much he could extract from Catalina Landing, a new office complex in nearby Long Beach. Binns's client was McDonnell Douglas Finance Corp., which signed up for 33,433 square feet of space for five years at a nominal rent of $22 a square foot, with free rent totaling $474,965. That brought the effective rate down to $19.20. In addition, the tenant got more parking space than normal in the area and free ''signage'' -- its logo atop the building. Because the landlord had been agreeable on every point, at the closing Binns suddenly asked for a locker room with 12 lockers and three showers for employees who jog. The landlord agreed to build one. Tenants can do better for themselves if they understand landlords' strategies. In new buildings, landlords prefer to offer free rent at the outset of the lease rather than reduce the rent proportionately over the full term. They reason that if they want to sell the building, and if they can wait until the period of free rent is over, the fat rent roll will make the building more valuable. Bargaining for an increase may also be easier from a higher rent figure at the end of the lease. Most tenants also prefer their free rent at the beginning of the lease, since they are starting a new operation or moving an old one and may well be pressed for cash. The drawback from the landlord's point of view is that this arrangement poses the risk that the tenant may abscond or go bankrupt once the rent-free period is over. To avoid that, landlords sometimes try to intersperse an occasional month of free rent among months of full rent. By contrast, in older buildings forced to make concessions to retain tenants, landlords may prefer to reduce each month's rent rather than grant free occupancy. Reason: accustomed to steady cash flow, they usually want to disrupt their budgets as little as possible. FOR SOME TENANTS, the office glut is not as pleasant as it appears. In certain cities the glut exists partly because so many tenants have been devastated by special economic circumstances. While the energy boom was on, developers in Houston could reasonably extrapolate a boundless demand for office space. ''When the world price of oil started to fall in 1982, a lot of tenants put plans to expand on hold,'' recalls Edward Cappel, manager of the downtown Houston office of Coldwell Banker. Later many of those tenants went bankrupt, further weakening the demand for space. Perhaps the most bizarre manifestation of the glut is the Phoenix Tower, a 34-story skyscraper in one of Houston's suburban office-building clusters. When the Phoenix was ready to open in 1984, the developers couldn't rustle up a major tenant and decided they would lose more money operating the building with a few small tenants than by keeping it closed. It is still closed. Denver was also hit hard by the energy collapse. The Miami office market was hurt by the Latin American debt crisis, which depressed the import-export trade and foreign-bank operations. All of this has been wonderful, of course, for tenants who aren't in the hammered industries. Space in the best buildings in downtown Houston rented for $25 to $28 a square foot in 1981. Five years later it is going for $10 to $15, all concessions considered. Despite the severity of the glut, Miami, Houston, and Denver are not strewn with the corpses of defunct developers. Lenders have repossessed probably no more than a dozen office buildings in Houston and only two or three in the Miami area. The most notable collapse in Miami was of Miami Center, taken over by Bank of New York. But in general the big lenders have the resources to wait out the softest of markets. Rather than foreclose, they readily reschedule debt payments, settling for a lower return for a while. If the landlord is really strapped, the lender may also get part ownership of the building or add to his stake. With increasing frequency major tenants are also using the buyers' market to get equity in buildings. Such deals can be almost breathtakingly favorable to the tenant, for they are not joint ventures -- only the landlord puts up a significant amount of capital. One of the better deals of this sort involves a project, developed by Oxford Properties of Toronto, that is now called Citicorp Plaza. As in the Denver deal with Kirkland & Ellis, Oxford wanted a prominent client to help impress lenders. Citicorp and a Los Angeles law firm, Lillick McHose & Charles, struck a deal in which the two tenants rent 35% of the space for 15 years at a flat rate of $22 a square foot. In return Citicorp receives 25% of the equity in the building, and the law firm 10%. They can deduct their share of the building's expenses and depreciation for tax purposes, and they get their share of any profits the building may earn and any capital gain if it is sold. But Michael E. Meyer, a prominent Los Angeles real estate attorney who negotiated the deal and whose firm is Citicorp's partner, points out that ''there is no free equity.'' By that he means that his firm and Citicorp did not get other concessions that they might have received from the landlord if they had forgone the equity. Concessions such as free rent are money in the bank for a tenant, while equity is a gamble, in some ways a perverse one. After all, why should a tenant who can get undreamed-of deals in today's glutted office market want a role on the other side, as an owner? One reason: hardly anyone believes the glut will last. Few businesses are more cyclical than office building. A shortage generates an enthusiastic spasm of activity that in turn leads to a glut. This time around, financial and tax incentives have intensified the glut by drawing money into the office market despite the slackening of demand (see box, page 64). Typically the oversupply leads to a near cessation of activity, which eventually creates another shortage and a repetition of what went before. Contributing to the cyclical pattern is the two to five years it takes to bring a building from drawing board to ribbon cutting. When developers are dreaming up a project and assembling the land, they are hardly likely to announce their plans. Rumors abound, of course, but they often come to nothing. Thus several developers in a community can become committed to projects before they become aware of the competition. John Dowling, an executive vice president of Cushman & Wakefield, a leading nationwide brokerage firm, blames the industry for amateurish forecasting methods ''using current market conditions as a barometer for the future, rather than forecasting both demand and the likely response of the industry.'' Dowling argues that developers didn't anticipate the surge in demand after the 1974-75 recession. When they caught on, shortages were evident in cities around the U.S., triggering a great office-building boom. In 1981 a record 327 million square feet of new space came to market. By 1983 shortage had turned to glut, but the building continued; 319 million square feet, the second- greatest amount ever, were completed in 1984. The figures are not all in for 1985, but they won't be much below the previous year's. Landlords can't do anything to get out of this fix. They can only wait and collect what rent they can get, often losing millions. Craig Bayless, who until recently ran the Cushman & Wakefield office in Houston, tells the sad tale of a building he represented, 1010 Lamar Street. Opened in 1979, it initially leased at $15 a square foot. The owners expected the rent would go to $20 by the mid-1980s. Instead, in an effort to compete with new buildings, they dropped the rent to $11. At that price the building could make a profit if it were fully rented. The trouble is that the building is 40% vacant, so it is running a loss. Who owns it? The British electrical workers' union pension fund. Says Bayless, ''Owners like that have a long view.'' They need it. THE GLUT will end because it has finally become so severe that lenders are cutting back on financing new projects. However slowly, the surplus space will be absorbed, the market will revert to its ''normal'' vacancy rate of 5% or so, and landlords will become stingier with concessions. Predictions by industry experts about how long that will take vary from two to three years in most cities to five or six years in Houston. Till then there is still time to get terrific deals because, remarkably, office building continues. In Miami an attractive new project called Lincoln Tower is rising on Brickell Avenue, the city's new prestige address. It is 80% owned by Metropolitan Life Insurance Co. and 20% by Lincoln Properties of Dallas, the developer. Lincoln's resident partner, Darryl Parmenter, has no trouble explaining why he is coming to market at this dismal period. ''It's the most expensive building on Brickell Avenue, with the best location,'' he claims. ''It is the only building that fronts both on the avenue and on Biscayne Bay.'' So he thinks it will attract tenants despite the glut. Parmenter's building, six months from completion, is 40% leased -- with concessions. The smartest tenants, in Miami and elsewhere, are locking up as much cheap space as they can imagine they will need. They realize that when the greatest office glut in 40 years coincides with a national economy still on the upswing, it is an opportunity they may not see again.

CHART: TEXT NOT AVAILABLE BOX: IT'S A GLORIOUS GLUT FOR BROKERS With so many tenants chasing bargain rents, real estate brokers are booming. Last year in Houston, for example, brokers helped lease 14.3 million square feet, but only 4.7 million represented new space. The rest was musical chairs, with brokers ringing up commissions every time the music stopped. Landlords are offering brokers unprecedented incentives to sign up renters. The program launched by the owner of 353 Sacramento Street in San Francisco is especially imaginative. Opened in 1982, the building was still 60% empty at the beginning of last year, with 150,000 square feet vacant. Any broker who showed the building to a prospective tenant got a bottle of California wine. If a tenant signed up, the broker got his commission -- $4 a square foot -- immediately, rather than 50% on signing and 50% when the tenant moved in. In July the landlord began awarding dinners for two at an expensive restaurant to brokers who showed the building. On November 1 the landlord started a lottery open to any broker who rented a remaining block of space. First prize: a Mercedes of the broker's choice worth up to $50,000. Second prize: dinner for two anywhere in the world, with transportation thrown in. By year's end the prizes were still available, and 29,000 square feet were left to rent.

BOX: LENDERS TAKE THE LONG VIEW An endless flow of financing -- from banks, syndicators, life insurance companies, pension funds, savings and loan associations, and foreigners -- has helped bring on the office glut. The lenders and investors may seem crazy at the moment, for many are taking a bath. But some may yet prove savvy. Economist Anthony Downs, an authority on the real estate scene and a senior fellow at the Brookings Institution, argues that capital markets are biased toward ''overinvesting'' in real estate. Among the factors he cites is the deregulation of interest rates that S&Ls and banks can pay for deposits, which sucked in huge amounts. To invest the money, S&Ls greatly expanded their real estate lending from the familiar field of homebuilding into office building, where they got new freedom to lend after a 1982 change in the law. The 1981 tax act triggered another significant bias by speeding depreciation of commercial property -- to a mere 15 years -- permitting taxpayers to shelter more income. & Many life insurance companies, giant investors, continue to regard office properties as sound. Their reasoning is simple: during inflation the price of real estate generally rises faster than other prices, and the insurers expect a new surge of inflation. Their real estate investments are awesome, and some have taken a beating lately. A Prudential Life Insurance Co. investment fund, more than half of which is invested in office structures, returned 10.8% in the fiscal year ended June 30, down from 14.2% the prior year. Between 1979 and 1984 returns were high in the 20s, sometimes more than double the inflation rate, which meant that real returns were much higher than now. The decline from those glorious highs reflects a falling rate of property appreciation and high vacancy levels. Metropolitan Life Insurance Co.'s Tower Fund, invested exclusively in finished buildings, has been similarly hurt. Its return for the year ended September 30 fell to 9.3%, vs. 20% and 18% for the two prior years. But the big insurers are looking at the long term. ''You have to,'' says Glen Coverdale, the executive vice president responsible for real estate at Metropolitan Life. ''I could have shown you buildings in the mid-1970s as bad as some of the present ones. Five years later they looked like the most brilliant investments that anybody could have dreamed of.'' Those projects began to flourish when the building cycle swung into the shortage phase and inflation ballooned. As lenders and developers unabashedly concede, what's bad for the country is good for real estate.