Real Estate
A landlords’ market?
Advice for tenants in today's dynamic commercial office market
By Troy Sympson
Smart Business Miami | April 2008
Laurel Oswald
Vice president of leasing
Transwestern, Miami office
In today’s commercial real estate market,
it’s the best of times or it’s the worst of
times, depending on whom you ask.
“It depends on what side of the negotiating table you are currently on,” says Laurel
Oswald, vice president of leasing for
Transwestern’s Miami office. “The next 18 to
24 months will continue to be an extremely
landlord-favorable market with tenants finding themselves in a position of fewer options
for available space on top of the skyrocketing rental rates and operating expenses. I am
seeing on a daily basis the difficulties that
tenants are experiencing in terms of their
corporate real estate in today’s market.”
Smart Business spoke with Oswald about
what companies face with upcoming lease
expirations or seeking relocations,what they
can expect for the near future and what
advice she would give them.
What are some of the challenges facing tenants in today’s office market?
It is somewhat of a perfect storm scenario
right now for tenants within the Miami-Dade
office market. Options are very limited in
terms of available space, with overall vacancy rates at less than 10 percent countywide
and even as low as 5 percent in Coral Gables
and other particular submarkets. Rental
rates are at an all-time high in the Brickell
and Downtown Central Business District
(CBD) markets and are rapidly approaching,
in some areas, $50 per square foot in the
Class A properties. In addition, there are little to no concessions being offered to tenants, and the near 3 million square feet of
new product under construction in Miami-Dade is not scheduled to deliver until 2010 or
2011. To compound this problem, in the last
few years, tenants have been hit with
tremendous increases [10 to 20 percent] in
operating expenses, primarily due to insurance and property taxes. Many buildings
have also recently traded, causing tax
reassessments and owners needing higher
rents in order to justify the purchase price.
Are there any value opportunities currently
available to tenants in today’s office market?
We have started to see an increase in sub-lease space recently becoming available due to downsizing and the downturn in the mortgage and residential real estate industries.
These spaces are being offered at rates substantially less than current market rates and
can be a viable alternative for companies
looking to wait out the present landlord
favorable conditions until 2010 or 2011 when
the new deliveries now under construction
are scheduled to come on-line.
Another trend that we have started to see
are companies presently located in Class A
buildings that have been paying mid-to-low
$30 per square foot that are unwilling to
absorb the 20 percent-plus rate increase to
renew. They are considering relocating to
Class B space with high-end build-outs in
order to maintain rental rate equilibrium
within the CBD.
What effect will the new deliveries have on
rental rates?
Time will tell, but now that Class A properties have surpassed $40 per square foot, we
expect that rents may flatten, but we don’t
foresee a dramatic decrease in rates once
new product is delivered. These new Class A
projects are projected to achieve mid-$40
per-square-foot rents in order to justify their costs of construction and land. That being
said, there will be many more alternatives
available creating movement of tenants from
building to building. We may see some incentives and concessions return to the market in
order to entice and secure tenants.
What is the most important piece of advice
that you can give your clients in today’s
market?
Engage a commercial real estate professional to uncover opportunities, analyze the
alternatives and to ensure that if construction is required it will be delivered on time
and on budget. Don’t underestimate how
long the relocation process can actually take
from looking at the alternatives to actual
move-in. Waiting too long to start the
process will result in even fewer viable alternatives and very little leverage in negotiations. We recommend starting the process at
least one year prior to a lease expiration
date. It typically takes several months to analyze all the options, make a selection and
fully execute a lease.
Unless a company is fortunate enough to
find a space where the design works ‘as-is,’
depending on the scope of the build-out and
the municipality issuing a permit, it could
take as long as six months just to deliver the
space. If the process is not managed in a
timely manner, it can result in delays for
move-in, ultimately creating a holdover scenario after lease expiration for the tenant in
its current location. During this holdover
period the tenant will likely incur a 150 to
200 percent rental rate premium.
We analyze the lease transaction as a
whole picture. The lowest rental rate does
not always equate to the most cost-effective
long-term deal. Many factors, such as building and operational efficiencies, strength of
ownership and options within a lease, need
to be carefully considered and structured
prior to making a long-term decision, especially in today’s dynamic office market.
LAUREL OSWALD is the vice president of leasing for Transwestern’s Miami office. Reach her at laurel.oswald@transwestern.net or
(305) 808-7820.
