Options for office tenants Featured

8:00pm EDT October 26, 2008

Economic conditions during the past several months have created a host of challenges for office tenants. In trying to match forward-looking strategic plans with the realities of today, many firms are perplexed as their revenue picture is cloudy and the expense lines garner greater focus. On the other hand, the slowdown in demand has given tenants an improved position in dealing with landlords.

“For those tenants who are renewing and for those looking at other options, today’s market conditions certainly play in the tenant’s favor,” says Jack Hoskins, a first vice president and occupier representative with CB Richard Ellis in Tampa.

“While there certainly are issues to contend with, the ability to craft a favorable deal can play an important part in improving the bottom line in a challenging business environment. With the right information and guidance, a tenant can find opportunity in the midst of today’s uncertainty.”

Smart Business spoke with Hoskins about current market conditions and the process a prospective tenant should follow.

How have market conditions changed to now favor the tenant?

The real estate markets in the most fundamental sense are simply a matter of supply and demand. While new construction has been tempered, we still have some new product either recently delivered or under construction. In addition, we have seen an increase in available sub-lease space as some firms downsize to try and reduce operating expenses in these uncertain times. The result is we have more options available.

On the demand side, fewer tenants are in the market. Those that face renewal are typically more prone to stay in place if possible and as expansion has slowed fewer new tenants are entering the market. The result is that those few active tenants will be highly sought after by today’s landlords.

Given that scenario, what can a prospective tenant expect to see in regard to deal terms?

Deal terms in this market really start with the needs and desires of the tenant. Today, most tenants are driven by two primary criteria: flexibility of terms and the overall economics of the deal. We are seeing a desire for shorter-term commitments so that firms can adjust as the economy starts to improve and allows them to return to a more traditional growth mode. At the same time, tenants are taking this time to find greater efficiencies in their operations. Current additional considerations may include a period of free rent and a more aggressive improvement allowance provided by the landlord. This is a noted change from a few years ago where space options were quickly absorbed and landlords who had space could command top dollar.

Outside of specific deal terms, what else is important to tenants today?

I am not sure much has changed but perhaps some issues have become more important. Every firm is concerned with its employee base. Retention of existing employees and attracting new associates is critical to long-term success. As such, most firms will try and remain somewhat stable in their geographical position if at all possible. Parking for those employees has always been a key issue especially as firms try and maximize space for efficiency purposes. A 4/5-to-1 (four/five spaces per one thousand square feet leased) ratio is now the preferred benchmark. Additionally, the proximity to amenities, such as restaurants, retail and hotels, is increasingly sought after to maximize efficiency of time and convenience. Of course, a beautiful water view is hard to beat!

We are also seeing an increased importance on LEED certification, especially if it is a new building. An example is the new Mosaic facility, which will be built in southern Hillsborough County.

How far ahead should a tenant begin to address its space needs?

It’s probably never too soon to start as space needs tend to change and develop over time. In general terms, a tenant should actively engage the process 12 to 18 months prior to lease expiration. This should start with initially working to determine what in fact the specifics of the requirement will be. This important step allows all parties to start from a common base of information so that all metrics can be fairly applied to all options. As opposed to the frantic pace of a few years ago, today’s market allows prospective tenants the benefit of time to work though the process and make informed decisions. Time is always a precious commodity; use it to your advantage.

JACK HOSKINS is a first vice president with CB Richard Ellis specializing in occupier representation. Reach him at (813) 273-8411 or jack.hoskins@cbre.com.