Tenants market

Tenants market

COMMERCIAL REAL ESTATE Q&A by Dave Szymanski | Tampa Bay Editor

A flood of new product, sublease space and a softer economy has put office tenants in the driver's seat.

At one time, office rental rates on the Gulf Coast kept rising as landlords took advantage of limited space. Tenants had to decide quickly or the space could go to someone else.

"I used to tell them, 'Make sure you have fresh ink in your pen because if you don't sign, someone else will,'" says Cheri O'Neil, senior vice president and branch manager of the Tampa office of Studley, a national commercial real estate brokerage. The Tampa office serves the Gulf Coast.

"A couple of years ago, tenants didn't have many choices," O'Neil recalls.

Times have changed. The weakened economy and an increase in new office space and subleases have made landlords compete and put tenants in the driver's seat.

To take advantage of the market, many companies have hired tenant brokers who are able to tap into national sales databases to determine fair market values. The tenant brokers often deal with brokers representing office buildings who are trying to maintain the value for their landlord client's buildings and cover his costs.

In most cases, landlords pay the tenant broker fee. Some leases can be 60 pages long.

One of the point people in this industry on the Gulf Coast is O'Neil, because Studley specializes in representing tenants only.

The Gulf Coast Business Review sat down with O'Neil to discuss the trends and forecasts for office space on the Gulf Coast.

Here is an edited portion of that interview:

From your perspective, what has happened to the commercial real estate market on the Gulf Coast?

"We opened the office here four years ago. I think it's fair to say it's a tenants' market now. Right now, West Shore has 1.8 million square feet of office space in the pipeline. There's Crescent and Highwoods Bay Center. They are waiting to pre-lease. Right now, there is 600,000 square feet in West Shore under construction. Surprisingly enough, asking rates, in the last quarter, showed a 1% decline (from $24.91 to $24.67)."

What kinds of things are landlords doing now?

We're seeing landlords offer limited free rent and concessions. Before, they wanted five-year deals. Now, they are actually willing to do three years in multi-tenant buildings.

Have there been ownership changes?

Yes. In the last three to four years, there have been a number of building ownership changes. There was a feeding frenzy. A spike in rents. It was time to cash out. People were underwriting deals based on huge increases in rents.

What has been the impact of the residential and capital market downturns?

The amount of sublease space (tenants leasing some of their own space) is up 80%. Commercial usually follows residential, and is 12 to18 months behind. We may see increased concessions and falling rental rates.

Are some building owners hesitant to lower rents?

Some landlords want to give other concessions first. Usually the large institutional owners are more hesitant to change. They are concerned about (the building's) value. So they offer free rent and tenant improvement allowances.

What will the market be like in future quarters?

The same activity will continue throughout the Gulf Coast. In the east, along I-75, there is Class B office product, brand new development. Subleasing will continue. There are still companies right-sizing, laying off. Home Depot closed its Tampa call center. Home Depot supports people doing home improvements. We recently toured clients around office space and six out eight properties used to be mortgage offices.

How has office space absorption been?

Quarterly absorption this quarter was the lowest since the third quarter of 2000. Landlords are willing to do shorter terms. Now they have to be more flexible. They are offering more tenant improvement dollars.

How are tenants reacting?

We're seeing the decision-making process take a little longer. Tenants are slower to make decisions. That's making landlords anxious. Maybe you, as a tenant, need the tenant improvement allowance. The landlords are absolutely being more flexible with other options to compete.

How do you approach this as a broker?

I tell the landlord, 'This is what we need. How badly do you want this deal?' I'm direct (laughs).

What about the brand new Class A buildings going up in the next year? Will they be able to command the rents they want?

Crescent (Crescent Resources in Westshore) may get the rate, but may offer concessions, such as an increased building allowance, free rent and flexible terms. Value is based on income stream. An owner can give free rent up front.

Why has Studley chosen to just represent tenants, unlike the other commercial brokerages?

It's a conflict-free business model. How far are you going to go for a tenant client? What we do is less about the market and more strategic. It's geared to the CFO because we can change the financial structure of the deal. It involves out-of-the-box thinking.

Are companies renegotiating leases before they are up for renewal?

Absolutely, we are restructuring. The chances of you renewing are greater.

What's the most difficult part of your job?

One of the most difficult aspects of my job is recruiting the right kind of peo0ple to be Studley brokers. We are quite the hybrid: Business/financial consultants that are compensated like traditional brokers. To work effectively at Studley, you need to be well-rounded in your business acumen beyond knowing the market, since that is often times every bit as important.

What do you enjoy most about your work?

I truly enjoy meeting new people in a variety of different career paths. As their trusted advisor, we are always challenged to learn as much as we can about their business practices. Given the multitude of different aspects to the service we provide, no two minutes are the same, which is intriguing and energizing. Finding solutions to complex issues for our clients is also very rewarding work.

REVIEW SUMMARY

Company: Studley

Industry: Commercial real estate brokerage services

Key: Tenants now have negotiating leverage in the market.