Market maximization Featured

7:00pm EDT December 26, 2008

In today’s real estate market, companies approaching their lease expirations can benefit from re-evaluating real estate strategies since their last lease agreement. Large shifts in the Detroit real estate market mean that you may have new or better options than in the past. And if you’re a landlord, aggressive strategies and creativity can help keep up occupancy rates and build tenant loyalty.

“Each relocation or renewal is different,” says Dan Morse, senior associate with Grubb & Ellis Company’s Detroit office. “Regardless of what side of the deal you’re on, there are opportunities.”

Smart Business spoke with Morse about the strategies tenants and landlords can use to maximize their opportunities in today’s market.

Would you call today’s office market a tenant’s market and, if so, why?

The current real estate environment favors tenants. The state of the economy has negatively impacted demand for real estate as corporations have downsized and looked for ways to find efficiencies in their businesses. As a result, about 2.5 million square feet has been added to the market since 2003. The increase in supply and decrease in demand means that tenants have the ability to benefit from lower rates, bigger incentives and more favorable lease terms.

That being said, landlords have some opportunities, as well. In these challenging times, landlords are in a position to work with their tenants and help them arrive at long-term solutions. Landlords can build tremendous loyalty and respect by building this type of relationship with their tenants.

What strategies do you recommend to both tenants and landlords in these circumstances?

First, don’t do it alone. Make sure you have a competent real estate professional as part of your team. Enlisting such a professional could save you money. Secondly, tenants should start early. I start working with companies about 12 to 16 months before lease renewal or eight to 10 months before relocation. This additional time allows tenants to think carefully about their goals, to research their options and to increase their negotiation leverage.

On the landlord side, I strongly recommend that landlords make every effort to satisfy their tenants’ needs. Upfront efforts will prove valuable when it is time to renew their existing tenant base. Keeping current tenants will avoid the costs associated with re-leasing the space or the possibility of the space being vacant for some time. For potential new tenants, I recommend creative means to incent prospects to relocate, especially if they have large operations. Bringing in a big company can often also bring in tenants that work with that business.

Landlords benefit from maintaining interior and exterior spaces and renovating facades, common areas, restrooms and parking lots. If the building has older suites, I recommend demolishing them to the shell condition. This allows people to visualize their build-outs in the interior instead of rejecting the building because it looks outdated. Landlords must do whatever they can to separate their buildings from competing properties to maintain and secure tenants.

What incentives are available to tenants?

When they talk with their current landlord, tenants can ask about reduced rental rates and upgrades to their current facility. Another possibility is to request to relocate or expand into property held by the same owner.

In situations where tenants are moving into another landlord’s building, tenants can negotiate competitive rental agreements and also ask for base rent abatement — not having to pay rent for a certain period of time — to offset the initial moving costs. Companies looking to occupy a new space can also seek tenant improvement allowances to adapt the building to best meet their operational needs.

Why do tenants seek some incentives over others?

What incentives are most attractive to tenants depends on their objectives. Reducing the rent per square foot keeps fixed costs low. A shorter lease option may have the most appeal for companies that may need to expand in the near future. If they have trouble finding a space that suits their operations, tenant improvement allowances may best meet their needs. Or if they’re relocating, rent abatement that offsets moving costs could be the preferable option.

Are there any incentives considered a winwin for both landlords and tenants?

Local and regional government incentives benefit both parties. With these programs, the tenant reduces costs at no expense to the landlord.

Securing these incentives involves sitting down with government representatives, reviewing the tenant’s business plan and discussing how providing incentives to that particular company can contribute to the overall growth plan of the state or municipality. The type of industry and number of jobs created or retained often factor into the decision to award incentives.

DAN MORSE is a senior associate at Grubb & Ellis Company’s Detroit office. Reach him at dan.morse@grubb-ellis.com or (248) 357-6582.