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March 04, 2002


 

Tenants Call the Shots in a Soft Office Market

By Michael Doan

 

Free rent, moving allowances, signing bonuses and big broker commissions - including an offer of a Porsche - are a few of the numerous incentives landlords are dangling before prospective tenants and their agents in many markets where demand for office and warehouse space remains weak.

Office rents will be especially soft this year in San Francisco, Boston, Atlanta, Seattle and Denver because of the dot-com collapse.  But that doesn't mean landlords in other cities can gloat.  Demand is squishy in most places - especially the suburbs - and is expected to stay that way until the economy revs up later this year.



Free rent is the biggest inducement offered to recruit new tenants in high-vacancy office buildings.  It may tip the scale for a potential customer that can pick and choose from a dozen buildings.  "Let's say you've got six months to go on your lease.  You might be willing to move in early if the new landlord offers you several months of free rent," says Andrew Ratner of Cushman & Wakefield in Los Angeles.  Many building owners will take this desperate measure to avoid lowering monthly rents.  Landlords fear that if they were to lower rents, existing tenants would demand equal treatment.  Lower rental rates also reduce the value of the building in the eyes of bankers and potential buyers.

There are other variations of free rent.  One is a step increase, in which rents begin lower than the listed rate but may be adjusted later by mutual agreement.  Another is one or two months of free rent at the end of each year of a contract.

Improvement allowances are another incentive, popular especially in areas where high-tech tenants are falling by the wayside.  The building owner promises to pony up for renovations, furniture or internal wiring, depending on the business owner's needs.  And in San Francisco, where dozens of dot-coms have gone out of business, landlords are able to provide fully wired offices with furniture, computers and furnishings acquired from the bankrupt predecessor.

Among other incentives:

  • Bigger commissions for brokers. Sometimes their fees are raised from 5% to 10% of the deal, or they may get golf trips to Palm Springs or Florida.  In Seattle, where vacancy rates have risen from 2% in mid-2000 to the midteens today, a landlord offered brokers their choice of a 2002 Porsche Boxster or $50,000 in cash for filling a three-story office building.

  • Lease assumptions.  "We've seen this for the first time in 10 years," says Kip Spencer of officespace.com.  "A company fills a vacant space, and the landlord assumes the existing lease."

  • Moving allowances.  The recruiting landlord pays all or part of the moving costs.

  • Gift certificates.  $100 from Nordstrom, simply for touring an office building.

  • Reserved space.  At no charge, space is set aside for the tenant's future expansion.

  • Signing bonuses.  Called cash allowances, they may include $50,000 to sign up for the next 10 years. 

 

 

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