COVER STORY, JULY 2009

OFFICE LEASING
Tenant and landlord reps discuss strategies to fill vacant office space.
By Lindsey Walker Marcec

The current office leasing environment definitely swings in favor of the tenant, but that doesn’t mean it’s a free for all. In many of Texas’ cities, there is a growing disconnection between what the tenants expect and what the landlords are willing to offer — causing many lease negotiations to take longer to get done. Texas Real Estate Business spoke with several landlord and tenant reps in Dallas, Fort Worth, Austin, San Antonio and Houston to find out what is really happening in their markets and what landlords can do to successfully attract tenants to their buildings.

Signs of progress can be seen everywhere in Oklahoma City. A massive transportation project is currently under way that will relocate a portion of Interstate 40, known locally as the Crosstown Expressway Bridge, that passes just south of the city’s downtown area. The old bridge was seeing much more traffic from the growing city than it was ever meant to accommodate, and additional repairs brought on simply from age were needed. Rather than expand the bridge, the Oklahoma Department of Transportation (ODOT) decided at the beginning of the decade to move the bridge one-half mile south of its current location.

In Dallas, office leasing activity has dropped off dramatically since the fourth quarter of 2008, and decisions are hard to get from both the tenants and the landlords, says Matt Heidelbaugh, senior director with Cushman & Wakefield of Texas’ Dallas office.

“Every tenant is evaluating opportunities in the market,” Heidelbaugh says.

Concessions offered by Dallas landlords, such as free rent, parking abatements and tenant improvement allowances, are luring tenants to sign new leases or renew current ones. With so much space available out there, many tenants are upgrading to better spaces for the same price.

Heidelbaugh, who is a tenant rep, says there are four key strategies landlords can use to attract tenants to their buildings:

• Stay competitive, and don’t price yourself out of the market;

• Be solvent and have good credit;

• Focus on tenant retention; and

• Be willing to counter your own offer. A tenant may not come back after the first proposal.

Frank Taylor, senior vice president with Jones Lang LaSalle in Dallas/Fort Worth, represents owners and landlords of office buildings. According to Jones, the biggest thing he’s seeing in the market is the growing gap between what landlords want and what tenants think they can get.

“Negotiations are taking a lot longer,” says Whit Kelly, also a senior vice president with Jones Lang LaSalle in Dallas/Fort Worth. “Whereas a 10,000-square-foot lease used to take 180 days, now it’s taking 270.”

Office leasing activity in Fort Worth is on its way up, according to Kelly and Taylor, but landlords and owners could still benefit from successful leasing strategies. These differ for each building owner.

“An owner with 95 percent occupancy is more patient with his/her deals,” Taylor says. “In a building with more vacancy, owners want to fill space but they don’t want to come too far off their rates.”

One way to do that is to load up the front with free rent and other concessions that don’t reduce the rate. And with the market the way it is, tenants might be tempted to take their time to really evaluate what they want (and what they could get out of their office space. But they shouldn’t wait too long, or they will miss out on the best spaces, Kelly says.

In Fort Worth, those best spaces include Class A space, which is most in demand, but because of the disconnect between bid and ask, some tenants are looking at B opportunities instead. There has been some movement from Class A downtown to Class A near downtown as well.

“The big savings is in parking,” Taylor says.

As Heidelbaugh mentioned, retaining tenants should be a top priority for owners and landlords. Taylor agrees.

“I’ve closed several renewals lately, which are critical for landlords to keep,” he says. “They are much easier than leasing to new tenants. As long as your owner is a good owner with good management, tenants don’t move and you can renew them at higher rates.”

Moving southeast to Houston, leasing activity is still taking place, but the pace is much slower than in 2007 and 2008, according to John Pruitt, senior vice president with CB Richard Ellis in Houston. The Woodlands, the Westchase District and the Energy Corridor have been outperforming the other Houston submarkets, and they will continue to do so in the coming months.

As in the D/FW Metroplex, there is a disconnect between what the landlords are asking and what the tenants expect in Houston’s office market. The key, Pruitt says, is to find out what is most important to the tenant (term, rate, allowance, renewal or cancellation, for example) and provide that item as closely as possible and try to keep the other items more neutral.

“Tenants are looking for 30 percent discounts from 2008 levels, and landlords are willing to provide 10 percent discounts,” Pruitt says.

Houston has a large office market (180 million square feet) and there will be 18 million to 25 million square feet that will expire and renew every year.

“There will always be a significant amount of leasing activity, even in slow markets,” Pruitt says. 

Heading over to Central Texas, San Antonio has had some good office leasing activity this quarter, with the size of deals being substantially larger than in the past few quarters, according to Christi Griggs, vice president with Cambridge Realty Group in San Antonio.              Continued on page 16

“This is attributed to San Antonio having a more stable market and economy with much smaller waves of fluctuation than other markets,” Griggs says. “The growth of Fort Sam and the government presence in our market must be given credit as well.”

Within the average lease negotiations taking place for San Antonio’s office space, flexibility is the key requirement. This is for several reasons, according to Griggs:

• Some are hoping to transition from tenants to real estate owners and are hoping prices will drop, so they are renewing for shorter terms or requesting flexibility in their leases (such as termination options); and

• Many are still uncertain of what the future holds and are hesitant to project their business growth and make any long-term commitments.

Landlords are trying to reach out and grab the tenants that they can, and, in order to do so, they are giving into some of these tenant requests and are providing free rent and aggressive tenant improvement allowances.

Unlike in D/FW and Houston, Griggs notes that San Antonio is not experiencing the same disconnect between bid and ask. 

“In some markets it is a fight of the landlord against the tenant,” she says. “We really don’t see that right now. It is basically simple: the tenants know they can expect concessions arguing the current economic state and the landlords acknowledge that and are proactive in securing tenants.”

In addition to flexibility, communication is another key to getting deals done in the current market, especially on the side of the landlord rep.

“Don’t hold out and try to create smoke screens on how bad a landlord does or does not need to sign a lease,” Griggs says. “At the end of the day, if the landlord is given the option, it is their decision to make. As long as we keep them informed of all of the details we have represented them well.” 

As with Heidelbaugh and Taylor, much of Griggs’ current leasing activity is renewing leases for her landlords’ built-in tenant base. According to Griggs, the only way for landlords to uproot their tenants is to create a big enough rent differential from their existing situation to justify a move.

“You are seeing some tenants willing to downgrade from Class A buildings to Class B if it is still a good-quality building that is well maintained and has a big enough rent differential,” Griggs says.

Austin is filled with many exceptionally strong and dynamic companies that have done well weathering the recession, according to Bob Bantly and Brian Butterfield with Grubb & Ellis Company.

“If you compare Austin to other metro areas nationwide, the city’s job growth has been head and shoulders above the rest,” says Butterfield, who is an associate in the firm’s Austiin office.

On the other hand, the current state of the economy has caused many local businesses to cut back on hiring plans over the past 12 months, directly affecting Austin’s office leasing market.

“As the economy improves, many of these companies will likely go on a hiring spree and snatch up workers sitting on the sidelines right now,” says Bantly, a senior vice president in the firm’s Austin office. “The increase in employees will lead to an increase in the need for space. This is when the market will really turn, from a leasing perspective.”

In the meantime, landlords in Austin — as in D/FW and San Antonio — are becoming increasingly creative with free and reduced rent, tenant improvement allowances and other forms of concession. The amount of concessions vary from building to building, but “some incredible deals are out there if a tenant is willing to extend their office search to an area with lessened demand,” Butterfield says.

Downtown Austin has recently experienced renewed interest from a number of tenants. The area’s wide variety of businesses have leased significant amounts of central business district (CBD) Class A space in the past 12 months.

“Downtown Austin is an exciting place to be right now, given the emergence of viable living options and a successful retail district,” Bantly says

Looking into the future, with no new office space currently under construction downtown, there could be a significant position shift between landlords and tenants. With the current state of the overall market, tenants are in a fairly favorable position to negotiate advantageous leases; however, as the market improves in coming years, the law of supply and demand could price a lot of tenants out of the area.

“Now would be a great time to sign a long-term lease in that part of town,” Butterfield says.

No matter which part of Austin you are in, the best leasing strategy a landlord could take is to discover each prospective tenant’s main issues. The real competition begins when potential tenants narrow down their site list; landlords then have to make their building more attractive than the others through incentives and concessions based on the prospects’ key issues.

Overall, Austin is well-positioned to come out of this recession stronger than before, according to Butterfield and Bantly.

“The young, well-educated workforce brings a level of creativity and vigor to local businesses that enables them to thrive,” Bantly says. “In addition, higher education and the government sector help the market stay afloat during tough times.”

Unique Issues in Medical Office Leasing
Standard lease provisions can create challenges.
By Andy Dow and Allan Katz

During the past couple of decades healthcare real estate has evolved into a major real estate asset class separate and distinct from the traditional real estate asset classes. Because of the unique nature of these facilities, many standard lease provisions create distinctive challenges when applied in a medical lease context. In addition, medical uses often produce eccentric issues not found in standard office or retail leases.

Many standard lease provisions require additional scrutiny where a medical use is involved. For example, since patients visiting medical facilities are more likely than the general public to have special needs relating to accessibility, the parties should pay special attention to the compliance with laws and accessibility provisions of the lease. In addition, HIPAA and other federal and state laws regulating confidentiality of medical records and personal health data may necessitate modifications to some typical clauses in standard office leases, such as provisions allowing landlord unfettered access to the premises.

Medical tenants also frequently utilize materials and generate waste (such as immunotherapy and chemotherapy agents, biological specimens and the like), which require appropriate disposal to comply with applicable federal and state environmental and waste disposal laws. Therefore, an absolute prohibition from the utilization of such materials is not appropriate, but the lease should clearly specify rules governing the use of such materials and which party is responsible for their disposal.

For the complete article, please visit: http://www.rebusinessonline.com/main.cfm?id=9552


©2009 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.




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