So Far So Good for Office Space Leasing in 2010
Apr 14, 2010
As we approach the end of the first quarter, office and retail leasing is showing strong signs of recovery-the phones are ringing again at commercial real estate offices.
Activity is strong for a variety of reasons. Rental rates in Class A offices are continuing to drop. This has created opportunities for firms currently in Class B buildings to upgrade to better offices for below their current rental rates. Along with this, smaller firms are enjoying opportunities to secure new offices in older buildings, and they are doing this at rates not seen since the dot-com crash of 2001.
This does not bode well for landlords however. With operating expenses running in the high teens for most Class A buildings, a high 20's to low 30's rental rate makes it difficult to make deals that require large amounts of tenant improvements. Building owners are turning to building out more spec suites to keep tenant improvements under control; this done by improving second-generation space with new paint, carpet, and lighting & ceiling systems. However, even with these cosmetic improvements, landlords are still spending $20 dollars per square feet or more to create these ready to lease spaces.
Tenants are also more willing to lock in these rental rates over longer lease terms. 7-year lease terms are becoming more common than 5-year lease terms with both landlords and tenants willing to commit to these terms to allow more time to amortize tenant improvement costs, as well as, allowing tenants to lock-in long term savings in rent.
Lenders are also more willing to allow landlords the flexibility to make longer-term deals, even though these low rental rates will present future problems in creating acceptable building values to support current loans on these properties.
In the retail market, single and smaller regional retailers are enjoying expansion opportunities in locations that previously would only consider large national firms. Rental rates are dropping, landlords are willing to commit to tenant improvements, that in the past, they would not consider for retailers in order to secure tenants.
Although this activity suggests good times ahead—without job growth, everything could slow down quickly again. Predictions are still for an unstable year, but certainly better than 2009—thank god!
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Written by: Hans Hansson
Hans Hansson is President of Starboard TCN Worldwide Real Estate Services as well as a member of the Board of Directors for TCN Worldwide Real Estate. Hans has been an active broker for over 25 years in the San Francisco Bay Area and specializes in office leasing and investments. If you have any questions or comments please email firstname.lastname@example.org or call him at (415) 765-6897. You may also check out his website, http://www.commercialspacefinder.com/.