Tuesday, January 31, 2012
Thursday, January 26, 2012
The Nuances of Leasing Medical Office Space — THE TENANT ADVISOR
The Nuances of Leasing Medical Office Space — THE TENANT ADVISOR
Medical users and physician practices don’t typically relocate to new buildings as often as general office tenants. However, the competition for new patients is increasingly steering physician practices to non-hospital campus properties as they seek more conveniently accessible locations for their patient base.
This trend is evident in the increased development of smaller suburban medical office projects and urgent care clinics you see in any significant metropolitan community. Furthermore it is increasingly common to see healthcare providers take space in smaller community retail centers near hospital campuses.
Medical users also tend to sign leases with longer terms than your typical office tenant, which puts them in the marketplace for office space less often. While many of the same sound principles required to lease general office space apply to healthcare, there are many nuances and issues that are unique to medical users that should be considered.
One of the first decisions they should make is to retain a broker with medical leasing experience. Hiring a tenant representative is prudent for any tenant. However, brokers who have experience in medical office leasing can be particularly helpful because they may be aware of available buildings and space that have not come to the attention of the practice and they understand how to structure terms and covenants of the lease agreement to fit the unique needs of the healthcare provider.
Some of these key issues include:
- Use Issues: Medical tenants use hazardous materials and generate biomedical waste. Medical tenants can use X-ray machines, CT scans, and other machines which may generate harmful radiation. As a result this creates special requirements that need to be accounted for in the lease document to ensure compliance.
- After Hours Access & Utilities: Medical tenants often may see patients after normal building hours and in the case of urgent care clinics operate on a 24-hour basis. Paying special attention to how the utilities are accounted for after normal building hours can save un-necessary utility expenses.
- Compliance with Americans with Disabilities Act (ADA): Patients are more likely than the general public to have special access needs. Buildings containing health care providers are more likely to receive ADA scrutiny. As a practical matter, medical tenants to pay special attention to the ADA clause contained in the lease document.
- Landlord Inspection & Privacy: Generally, commercial leases provide the landlord the right to re-enter your space to show the premises to future tenants, inspect for compliance with the lease and allow access to make infrastructure repairs in the lease premises and elsewhere in the building. Yet health care providers need to limit the landlord’s access to examining rooms and other areas during certain hours of the day as well as non-access to patient records.
- Anti Kick-back Issues: Safe harbors created under the Federal anti-kickback laws create special requirements for leases between medical tenants and properties that are hospital or physician owned. Proper compliance and documentation must be addressed if the landlord-tenant relationship exists.
- Exclusivity Provisions: An exclusive use provision is a lease term in which the landlord promises not to lease any other space in the development to a party whose intended use would be in direct competition with tenant’s use of its space. In medical office buildings it can be prudent to get exclusivity for your specific specialty practice.
- Death & Disability Clauses: In the case of solo practitioners, the concept of getting a death and disability clause in the lease providing for the ability to cancel the lease (typically with penalty) in the event the physician is unable to practice due to death or disability should be explored. Landlords will resist with the argument that the tenants insurance should provide for this, but in some cases, this provision can be successfully negotiated into lease agreements.
- Tenant Improvements: The cost of build-out for the typical medical user often greatly exceeds that of a general office tenant. In today’s market even a modest office design can run $40.00-$60.00 per square foot. The extensive plumbing, millwork and equipment compliance issue creates additional cost as well as specific lease and transaction issues, including:
- Term: As a result of the typically higher tenant finish out costs it common for medical office leases to be 7-10 years in term as opposed to 3-5 years for general office tenants. The longer term should result in a larger tenant improvement allowance for the Landlord.
- Architect & Contractor: Landlord’s generally like to have tenant finish work done by contractors with whom the landlord has a prior relationship and in some cases design professionals as well in order to maintain control of the process. However, it is critical for the tenant to obtain the right to use his contractor and design and construction professionals who are experienced and qualified in medical design and build-out as well as maintain some control in the management of the design and construction process.
- Relocation Provision: It is common for office leases to contain provisions requiring the tenant to consent to a substitute premises should the landlord decide that it is in the landlord’s best interest to move the tenant from one suite in the building to another. Because of the specialized build-out needs of the medical tenant, medical tenants should resist these provisions.
- Liens: As a result of the cost of medical leasehold improvements, physician practices often finance leasehold improvement costs above the landlord allowance as well as medical equipment purchases. Lien rights provided to the Landlord should be subordinate to the Tenant’s lenders for medical equipment purchases.
- Restoration of Premises: Virtually all office and retail leases contain provisions addressing the Landlord’s and Tenant’s rights and responsibilities regarding restoration obligations at the end of the lease. These provisions need to dovetail with the special situation of a medical tenant.
For the medical user real estate is a significant multi-year financial commitment, utilizing a knowledgeable real estate advisor and careful planning can insure selection of the right location and a well structure a transaction and lease agreement to fit the unique needs of the healthcare provider.
Renew or Relocate? Incumbent Landlords Willing To Sweeten the Pot - CoStar Group
Renew or Relocate? Incumbent Landlords Willing To Sweeten the Pot - CoStar Group
While perhaps not a nationally significant or unusual deal by itself, U.S. Cellular's renewal this past month of an office lease in Madison, WI, succinctly depicts the current state of leasing.
U.S. Cellular agreed to extend its lease with affiliates of Wells Real Estate at the U.S. Cellular Building, a four-story, 102,000-rentable-square-foot office building. The Chicago-based carrier leases 73% of the building and owns a 45% equity interest in the property. The amendment extends the lease from April 2013 to December 2017. As part of the deal, the monthly base rent will decrease 11% from $87,668 to $77,830. In addition, U.S. Cellular is entitled to a four-month rental abatement.
Several things about this deal make it typical of other firms making lease renewal decisions in the current market. Landlords have a vested interest in holding onto quality paying tenants, or risk loss of income, more scrutiny from current and potential lenders, and face higher marketing costs to re-fill the space.
Tenants, too, have a vested interested in staying put. While in this case, the tenant is part owner, in other cases, tenants face a disruption in their business and significant relocation and operational costs if they leave a good location. But the market reality is that there are good deals to be had out there as vacancies remain stubbornly high and money for refinancing commercial properties remains hard to come by. As a result, tenants are clearly making the decision to at least shop around.
"In sectors like the office market, we're finding tenants taking the opportunity in a soft market to upgrade office image and pick-up additional amenities by moving from a Class B building to a Class A building, generally with minimal increases in their rent. The term you hear tossed around is 'flight to quality,' " said Ryan Walsh, principal of RadatzWalsh Inc. in Edina, MN.
"To compete with the market, landlords are offering up free rent to keep tenants, somewhere around one month per year of the lease, (net or gross) depending on the situation and other terms," Walsh said. "Also, improvement money is being spent to upgrade finishes and make spaces more functional on extensions. Usually $10 to $20/square foot for 3- to 5-year deals and some additional credits or rent reductions if the space can be used as is."
"It is all on a case-by-case basis," Walsh said, "but the savvy landlords factor in the costs of having the space sit vacant for a while, tenant improvements for new groups and other transactions costs. They generally come to the conclusion that it is in their best interest to work hard to keep a good tenant that they know pays rent on time."
Editor's Note: While tenants enjoy the upper hand currently, CoStar's latest market outlook sees big changes ahead for U.S. office markets.
Nelson Taylor, owner/broker of William Raveis Chapman Enstone in Providence, RI, said tenants are also leveraging the market to cut a better deal for themselves.
"Many will approach their current landlords for lease/term reductions," Taylor said. "Tenants will approach me to give them comps to support their requests. More often than not, if their requests are reasonable, owners will agree to a reduction. If owners prove inflexible, tenants will move."
"Owners are much more flexible with 3- to 5-year leases. In my world of crossover commercial, most owners are reluctant to do anything over five years, though they will offer renewal options. At least 10% reductions in the overall lease costs," Taylor said.
While U.S. Cellular merely extended its current lease, CoStar is also seeing landlords offering concessions to tenants who renew -- even if they are downsizing. Case in point, AeroGrow International Inc. amended its lease with Pawnee Properties LLC in November 2011 for its headquarters at 6075 Longbow Drive in Boulder, CO. AeroGrow renewed its lease but reduced its square footage from 16,184 to 9,868. The landlord reduced the monthly base rent 23% to $9,046 ($0.92/square foot/month) from $19,261 ($1.19/square foot/month). The lease was extended 18 months to September 2014.
"My experience is that all my clients are reassessing their space needs, consolidating as necessary, removing redundancy and heavily incorporating hi tech where it can," said Guy Levingston, principal of Intermountain Commercial Real Estate in Boise, ID. "They will shop the market and present competitive bids back to landlord to see if the landlord will budge or meet the best deal. You call it landlord generosity; I call it "market rate" for 2012. I believe it is going to take some years for office market rental rates to climb back up to what was considered "normal" before the 2007 downturn."
Kevin Postal, president/broker of Atlantic Property Group in Port St. Lucie, FL, agreed, adding that such short-term concessions provide a way for the landlord to ride out the down market.
"Most landlords don't want to sign leases longer than three years at the lower rate hoping that there is light at the end of the tunnel for better returns on their investments," Postal said. "It is definitely a buyer's market, but landlords usually won't show their hand until it's absolutely necessary. I've seen reductions up to 30% in some office rents."
"Although most tenants prefer to stay in existing locations, they are also economy-minded these days," Postal said. "Of course, they want to seek out the best deal in the market. I am finding that tenants are willing to move as far as 15 to 25 miles in any direction if it means saving money."
Many tenants are also taking advantage of current conditions to expand at their current location while signing on for a lease extension.
REVA Medical Inc. did just that for its corporate headquarters at 5751 Copley Drive in San Diego. REVA more than doubled in size, expanding from 17,018 square feet to 37,470 square feet under a new deal with landlord ARI Commercial Properties that extends its lease through January 2018. Under the terms of the lease amendment, the annual base rent for the leased space increases over the term from $37,000/month (80 cents/square foot) to $60,000/month ($1.60/square foot) at the end of the lease. Up until the amendment, REVA Medical had been currently scheduled to pay $1.60/square foot per month.
"Many landlords have offered reduced rates to blend-and-extend for three to five additional years. I don't view this as landlords being generous but rather (they are) being strategic to lock-in longer lease terms, stagger expirations, and reduce capital expenditures," said Steve Rosetta, executive vice president | market leader, Cushman & Wakefield of San Diego.
"We are seeing tenants shop around for better terms and more flexibility versus renewing," Rosetta said. "In the end, a tenant may renew but they are all testing the market. Landlords may be reluctant to drop rates to keep a tenant initially but nearly all will reduce rates rather than loose a tenant to another building."
NetSuite Inc., which leases 79,589 square feet for its corporate headquarters at 2955 Campus Drive in San Mateo, CA, extended its lease in December for another seven years until August 2019. In 2010, NetSuite had already amended its original lease signed in 2008 to reduce its space to its current size. With the extension just signed, NetSuite will be paying $40.20/square foot per year in 2013. Under its original 2008 lease, NetSuite had been scheduled to pay $63.88/square foot per year this year. So by extending long term, NetSuite has cut its scheduled rent more than a third.
"At the beginning of a process, a [tenant] client may feel they will renew or give back space. However, after going through a real estate process it becomes quite clear what is financially and operationally more favorable," said Michael McKeever, senior vice president, UGL Services Los Angeles. "The smart landlords are offering concessions to maintain occupancy, so the tenant may renew but typically on much better terms than they originally thought. It's case by case. Some clients are reducing their rent by 20% and combined with space give back sometimes 40%+ reduction."
We asked other commercial real estate industry professionals what they are seeing in terms of office renewal negotiating conditions in their markets. The following are some of their comments.
Over the past 18 months, I have seen tenants continue to operate in their current location. Occasionally they have tested the market but they prefer to stay put and typically pay a little bit of a premium to do so. Of course this premium does not take into account the costs and the disruption associated with the move. I have not seen the rent reduction in renewals. I have seen landlords reduce the rent if the tenant expands within the asset and commits for an additional seven to five years. Over the past 12 months, I have seen very little downsizing. If anything, I have experienced the tenant expanding if space is available.
Todd Jones, Founder / Principal, Lone Star Realty Advisors, Irving, TX
[Tenants] are definitely shopping the market, but in most cases they are renewing their leases. It is expensive to move so if there is not a significant reason to leave their current building, most companies are staying. These companies are investigating the market and negotiating aggressive terms from landlords. Current landlords typically have the edge by being able to offer lower tenant improvement costs and still accommodate tenants. In addition, companies don't face expensive moving costs when they renew their leases and it is less disruptive to their business.
Bill Rothstein, Senior Vice President / Brokerage Services, Cushman & Wakefield NorthMarq, Minneapolis, MN
All tenants are shopping around for better terms. However, a smaller percentage actually ends up relocating. Relocation costs vary depending on a number of factors and often times it can be the determining factor. Additionally, better terms generally come with longer lease terms, from which the majority of tenants in Orange County currently shy away. It depends on the ownership entity, the debt structure, where the asset sits in the lifecycle of the fund and the portfolio strategy. In some cases, we've seen savings north of 25% to 30%, whether through straight rent reduction, free rent or some combination of the two. It also depends how much lease term is left and position relative to market.
Eric Antonini, Vice President, UGL Services Orange County
More of my clients are looking for office space or land to purchase, seeing this down market as an opportunity to buy their own instead of continuing to lease from others. Activity is definitely up, with more work to do than I could have imagined.
Mark W Kidd,, President, M Kidd Properties Inc., Houston, TX
From my perspective, we are still seeing tenants actively looking to evaluate the office market alternatives in order to make an informed decision about leases expiring. Some tenants want to upgrade their office space to better buildings for office rents close to the same that they are currently paying. I am still seeing quite a few tenants that prefer to renew or short term extend leases in place to not incur the costs of moving. Lastly, I am seeing some smaller tenants 5,000 to 15,000 square feet looking to purchase buildings at reasonable prices to take advantage of low interest rates and opportunities to own.
Robert J. Donnelly, Jr., CCIM, Executive Director | Capital Markets Group, Cushman & Wakefield of New Jersey Inc., Morristown, NJ
Our clients are making the effort to renew their lease well in advance of the renewal date. I think there are two business reasons: Taking uncertainty of real estate space out of the business climate; and locking in the cost of real estate in a down market for a predictable period of time. Property owners in general are resisting this effort and are holding the out to the last possible moment to renegotiate, running the risk of tenant alienation. To the extent lease terms includes an arbitration clause, this resistance includes resolving rent related issues by use of arbitration.
John Guillory, President, Northridge Group, Oakland, CA
Landlords are still holding on tight to their tenants and are willing to be more aggressive on renewal lease terms. Landlords can't afford the downtime/loss of revenue; therefore, they are willing to reduce renewal rents. Because of the favorable renewal rates, tenants are signing up for additional square footage to lock in today's low rates. In most cases, there has been pent up demand for more space and coupled with the low renewal rates is driving the rollover expansion of space. Landlords are still providing free rent to maintain face rates. Free rent is applied to parking and storage space as well. The majority of landlords are still providing turnkey improvements instead of a fixed improvement amount. Overall, concessions haven't reduced but have remained fairly steady.
JR Pearce, Crown Acquisitions Inc., Laguna Niguel, CA
For a couple of years now, our percentage of transactions related to renegotiations and renewals has increased dramatically. The past two years, 75% of our transactions have been renegotiations and/or renewals. We have reduced tenants' rates as far as 18 months before expiration. In new leases, we are seeing one month free for each year of term. We usually are able to negotiate for at least that, maybe more. Most landlords are clinging to their TI dollars. But some healthy ones use TI dollars as needed especially to attract tenants, as corporations aren't able or wanting to use their capital for TI's.
Denis Mehigan, Principal, The Mehigan Co., San Francisco
The few firms that are growing are expanding and securing good lease rates and terms. However, most corporations have learned to do more with less and are leaving very little room for expansion. On renewals most are holding or taking less. With the lack of new construction and the improving fundamentals, many tenants could be surprised at how fast the office market can turn from a tenants' market to a landlords' market. We believe 2012 will continue to slow demand and gradual occupancy improvements. But after the elections, we believe because of pent up demand in 2013 there will be a rush of expansion and with the lack of new construction, we could see a strong landlord oriented market by as soon as 2014.
Michael Bull, President & Founder, Bull Realty Inc., Atlanta, GA
While perhaps not a nationally significant or unusual deal by itself, U.S. Cellular's renewal this past month of an office lease in Madison, WI, succinctly depicts the current state of leasing.
U.S. Cellular agreed to extend its lease with affiliates of Wells Real Estate at the U.S. Cellular Building, a four-story, 102,000-rentable-square-foot office building. The Chicago-based carrier leases 73% of the building and owns a 45% equity interest in the property. The amendment extends the lease from April 2013 to December 2017. As part of the deal, the monthly base rent will decrease 11% from $87,668 to $77,830. In addition, U.S. Cellular is entitled to a four-month rental abatement.
Several things about this deal make it typical of other firms making lease renewal decisions in the current market. Landlords have a vested interest in holding onto quality paying tenants, or risk loss of income, more scrutiny from current and potential lenders, and face higher marketing costs to re-fill the space.
Tenants, too, have a vested interested in staying put. While in this case, the tenant is part owner, in other cases, tenants face a disruption in their business and significant relocation and operational costs if they leave a good location. But the market reality is that there are good deals to be had out there as vacancies remain stubbornly high and money for refinancing commercial properties remains hard to come by. As a result, tenants are clearly making the decision to at least shop around.
"In sectors like the office market, we're finding tenants taking the opportunity in a soft market to upgrade office image and pick-up additional amenities by moving from a Class B building to a Class A building, generally with minimal increases in their rent. The term you hear tossed around is 'flight to quality,' " said Ryan Walsh, principal of RadatzWalsh Inc. in Edina, MN.
"To compete with the market, landlords are offering up free rent to keep tenants, somewhere around one month per year of the lease, (net or gross) depending on the situation and other terms," Walsh said. "Also, improvement money is being spent to upgrade finishes and make spaces more functional on extensions. Usually $10 to $20/square foot for 3- to 5-year deals and some additional credits or rent reductions if the space can be used as is."
"It is all on a case-by-case basis," Walsh said, "but the savvy landlords factor in the costs of having the space sit vacant for a while, tenant improvements for new groups and other transactions costs. They generally come to the conclusion that it is in their best interest to work hard to keep a good tenant that they know pays rent on time."
Editor's Note: While tenants enjoy the upper hand currently, CoStar's latest market outlook sees big changes ahead for U.S. office markets.
Nelson Taylor, owner/broker of William Raveis Chapman Enstone in Providence, RI, said tenants are also leveraging the market to cut a better deal for themselves.
"Many will approach their current landlords for lease/term reductions," Taylor said. "Tenants will approach me to give them comps to support their requests. More often than not, if their requests are reasonable, owners will agree to a reduction. If owners prove inflexible, tenants will move."
"Owners are much more flexible with 3- to 5-year leases. In my world of crossover commercial, most owners are reluctant to do anything over five years, though they will offer renewal options. At least 10% reductions in the overall lease costs," Taylor said.
While U.S. Cellular merely extended its current lease, CoStar is also seeing landlords offering concessions to tenants who renew -- even if they are downsizing. Case in point, AeroGrow International Inc. amended its lease with Pawnee Properties LLC in November 2011 for its headquarters at 6075 Longbow Drive in Boulder, CO. AeroGrow renewed its lease but reduced its square footage from 16,184 to 9,868. The landlord reduced the monthly base rent 23% to $9,046 ($0.92/square foot/month) from $19,261 ($1.19/square foot/month). The lease was extended 18 months to September 2014.
"My experience is that all my clients are reassessing their space needs, consolidating as necessary, removing redundancy and heavily incorporating hi tech where it can," said Guy Levingston, principal of Intermountain Commercial Real Estate in Boise, ID. "They will shop the market and present competitive bids back to landlord to see if the landlord will budge or meet the best deal. You call it landlord generosity; I call it "market rate" for 2012. I believe it is going to take some years for office market rental rates to climb back up to what was considered "normal" before the 2007 downturn."
Kevin Postal, president/broker of Atlantic Property Group in Port St. Lucie, FL, agreed, adding that such short-term concessions provide a way for the landlord to ride out the down market.
"Most landlords don't want to sign leases longer than three years at the lower rate hoping that there is light at the end of the tunnel for better returns on their investments," Postal said. "It is definitely a buyer's market, but landlords usually won't show their hand until it's absolutely necessary. I've seen reductions up to 30% in some office rents."
"Although most tenants prefer to stay in existing locations, they are also economy-minded these days," Postal said. "Of course, they want to seek out the best deal in the market. I am finding that tenants are willing to move as far as 15 to 25 miles in any direction if it means saving money."
Many tenants are also taking advantage of current conditions to expand at their current location while signing on for a lease extension.
REVA Medical Inc. did just that for its corporate headquarters at 5751 Copley Drive in San Diego. REVA more than doubled in size, expanding from 17,018 square feet to 37,470 square feet under a new deal with landlord ARI Commercial Properties that extends its lease through January 2018. Under the terms of the lease amendment, the annual base rent for the leased space increases over the term from $37,000/month (80 cents/square foot) to $60,000/month ($1.60/square foot) at the end of the lease. Up until the amendment, REVA Medical had been currently scheduled to pay $1.60/square foot per month.
"Many landlords have offered reduced rates to blend-and-extend for three to five additional years. I don't view this as landlords being generous but rather (they are) being strategic to lock-in longer lease terms, stagger expirations, and reduce capital expenditures," said Steve Rosetta, executive vice president | market leader, Cushman & Wakefield of San Diego.
"We are seeing tenants shop around for better terms and more flexibility versus renewing," Rosetta said. "In the end, a tenant may renew but they are all testing the market. Landlords may be reluctant to drop rates to keep a tenant initially but nearly all will reduce rates rather than loose a tenant to another building."
NetSuite Inc., which leases 79,589 square feet for its corporate headquarters at 2955 Campus Drive in San Mateo, CA, extended its lease in December for another seven years until August 2019. In 2010, NetSuite had already amended its original lease signed in 2008 to reduce its space to its current size. With the extension just signed, NetSuite will be paying $40.20/square foot per year in 2013. Under its original 2008 lease, NetSuite had been scheduled to pay $63.88/square foot per year this year. So by extending long term, NetSuite has cut its scheduled rent more than a third.
"At the beginning of a process, a [tenant] client may feel they will renew or give back space. However, after going through a real estate process it becomes quite clear what is financially and operationally more favorable," said Michael McKeever, senior vice president, UGL Services Los Angeles. "The smart landlords are offering concessions to maintain occupancy, so the tenant may renew but typically on much better terms than they originally thought. It's case by case. Some clients are reducing their rent by 20% and combined with space give back sometimes 40%+ reduction."
We asked other commercial real estate industry professionals what they are seeing in terms of office renewal negotiating conditions in their markets. The following are some of their comments.
Staying Put
Over the past 18 months, I have seen tenants continue to operate in their current location. Occasionally they have tested the market but they prefer to stay put and typically pay a little bit of a premium to do so. Of course this premium does not take into account the costs and the disruption associated with the move. I have not seen the rent reduction in renewals. I have seen landlords reduce the rent if the tenant expands within the asset and commits for an additional seven to five years. Over the past 12 months, I have seen very little downsizing. If anything, I have experienced the tenant expanding if space is available.
Todd Jones, Founder / Principal, Lone Star Realty Advisors, Irving, TX
[Tenants] are definitely shopping the market, but in most cases they are renewing their leases. It is expensive to move so if there is not a significant reason to leave their current building, most companies are staying. These companies are investigating the market and negotiating aggressive terms from landlords. Current landlords typically have the edge by being able to offer lower tenant improvement costs and still accommodate tenants. In addition, companies don't face expensive moving costs when they renew their leases and it is less disruptive to their business.
Bill Rothstein, Senior Vice President / Brokerage Services, Cushman & Wakefield NorthMarq, Minneapolis, MN
All tenants are shopping around for better terms. However, a smaller percentage actually ends up relocating. Relocation costs vary depending on a number of factors and often times it can be the determining factor. Additionally, better terms generally come with longer lease terms, from which the majority of tenants in Orange County currently shy away. It depends on the ownership entity, the debt structure, where the asset sits in the lifecycle of the fund and the portfolio strategy. In some cases, we've seen savings north of 25% to 30%, whether through straight rent reduction, free rent or some combination of the two. It also depends how much lease term is left and position relative to market.
Eric Antonini, Vice President, UGL Services Orange County
Buying Rather Than Renewing
More of my clients are looking for office space or land to purchase, seeing this down market as an opportunity to buy their own instead of continuing to lease from others. Activity is definitely up, with more work to do than I could have imagined.
Mark W Kidd,, President, M Kidd Properties Inc., Houston, TX
From my perspective, we are still seeing tenants actively looking to evaluate the office market alternatives in order to make an informed decision about leases expiring. Some tenants want to upgrade their office space to better buildings for office rents close to the same that they are currently paying. I am still seeing quite a few tenants that prefer to renew or short term extend leases in place to not incur the costs of moving. Lastly, I am seeing some smaller tenants 5,000 to 15,000 square feet looking to purchase buildings at reasonable prices to take advantage of low interest rates and opportunities to own.
Robert J. Donnelly, Jr., CCIM, Executive Director | Capital Markets Group, Cushman & Wakefield of New Jersey Inc., Morristown, NJ
Renewal Process Starting Well in Advance of Expiration
Our clients are making the effort to renew their lease well in advance of the renewal date. I think there are two business reasons: Taking uncertainty of real estate space out of the business climate; and locking in the cost of real estate in a down market for a predictable period of time. Property owners in general are resisting this effort and are holding the out to the last possible moment to renegotiate, running the risk of tenant alienation. To the extent lease terms includes an arbitration clause, this resistance includes resolving rent related issues by use of arbitration.
John Guillory, President, Northridge Group, Oakland, CA
Landlords Holding on Tight to Tenants
Landlords are still holding on tight to their tenants and are willing to be more aggressive on renewal lease terms. Landlords can't afford the downtime/loss of revenue; therefore, they are willing to reduce renewal rents. Because of the favorable renewal rates, tenants are signing up for additional square footage to lock in today's low rates. In most cases, there has been pent up demand for more space and coupled with the low renewal rates is driving the rollover expansion of space. Landlords are still providing free rent to maintain face rates. Free rent is applied to parking and storage space as well. The majority of landlords are still providing turnkey improvements instead of a fixed improvement amount. Overall, concessions haven't reduced but have remained fairly steady.
JR Pearce, Crown Acquisitions Inc., Laguna Niguel, CA
For a couple of years now, our percentage of transactions related to renegotiations and renewals has increased dramatically. The past two years, 75% of our transactions have been renegotiations and/or renewals. We have reduced tenants' rates as far as 18 months before expiration. In new leases, we are seeing one month free for each year of term. We usually are able to negotiate for at least that, maybe more. Most landlords are clinging to their TI dollars. But some healthy ones use TI dollars as needed especially to attract tenants, as corporations aren't able or wanting to use their capital for TI's.
Denis Mehigan, Principal, The Mehigan Co., San Francisco
A Tenant's Market Can Turn on Dime
The few firms that are growing are expanding and securing good lease rates and terms. However, most corporations have learned to do more with less and are leaving very little room for expansion. On renewals most are holding or taking less. With the lack of new construction and the improving fundamentals, many tenants could be surprised at how fast the office market can turn from a tenants' market to a landlords' market. We believe 2012 will continue to slow demand and gradual occupancy improvements. But after the elections, we believe because of pent up demand in 2013 there will be a rush of expansion and with the lack of new construction, we could see a strong landlord oriented market by as soon as 2014.
Michael Bull, President & Founder, Bull Realty Inc., Atlanta, GA
Landlords Poised to Regain Upper Hand In Recovering Office Market - CoStar Group
Landlords Poised to Regain Upper Hand In Recovering Office Market - CoStar Group
Office space absorption doubled during 2011 as the office-using job base expanded and vacancies declined across nearly two-thirds of U.S. submarkets, CoStar Group reported this week in its Year-End 2011 Office Review & Outlook. The report presented to CoStar clients found that positive momentum in office fundamentals and the continued absence of new construction is expected to result in higher rents for building owners over the next few years.
Office sales increased steadily through 2011 over the previous year as investors sought to get ahead of the curve, with investor interest spreading beyond the safer well-leased investment-grade buildings in top-tier markets and into smaller properties and second-tier markets such as Seattle, Atlanta and Northern New Jersey. Total fourth-quarter 2011 office sales are likely to match or exceed fourth-quarter 2010’s impressive $25 billion once all sales are tallied.
Total CRE sales, which evened out in 2011 across all property types, is estimated at nearly $300 billion, the highest since the peak of the real estate boom in 2007, and well above the historical average of around $220 billion since 2000.
Although office tenants continue to hold the cards in many markets, (see related topic:"Renew or Relocate? Incumbent Landlords Willing To Sweeten the Pot") CoStar reports the outlook appears to increasingly favor building owners in coming years as the cycle continues.
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"To sum it up, for the office market, we’re just now getting started. Now is a good time to be an office investor," said Walter Page, director of research for Property and Portfolio Research (PPR), CoStar’s analytics and forecasting division. "We expect vacancy to continue to decline through 2015, and when you have declining vacancy rates, you can raise rents, returns are better, and for an investor, that’s good news."
Economy Shows Positive Signs For CRE
CoStar Group founder and CEO Andrew Florance noted that, although overall employment growth has been anemic, the U.S. posted a solid 1.7% gain in office-using jobs, led by technology and energy markets such as Seattle, Boston, San Francisco and Dallas.
Other positive signs abound, including a leveling off in the loss of manufacturing jobs and a bottoming of the housing market, which should be less of a drag on the economy going forward, and likely to be the source for new jobs as replacement demand for single-family and apartment housing fuels expected construction demand.
Meanwhile, corporate profits are off the charts, from $800 billion in 2000 to $2 trillion in 2011.
"Coupled with low interest rates, companies are in a position to invest aggressively in new facilities and equipment. From a CRE perspective, Corporate America is well positioned to invest in their businesses, plant facilities and equipment," Florance added.
Challenges remain, including relatively weak consumer confidence, continued high unemployment, a record federal budget deficit and economic upheaval in Europe. Occupancy recovery varies widely between metros, with "have" markets such as supply-constrained New York City showing 7.4% vacancy and housing bust "have-nots" like Phoenix lingering at a stubbornly high 20.7%.
However, CRE values have recovered to roughly 2000-year levels, and vacancies declined across the country last year. In a strong indicator of an impending office rebound, vacancy rates declined in 63% of the 2,400 office submarkets tracked by CoStar. That’s the strongest number since 2004-05, which roughly marked the beginning of the last CRE up cycle.
In the fourth quarter, CoStar recorded 18 million feet of net absorption, which drives occupancy rates and other leasing fundamentals, and a total of 49 million square feet for the year, doubling 2010’s absorption.
Despite rising concerns about the darkening economic picture that started last spring and continued through the year, absorption rose sharply in the second half of 2011, said Page, noting that companies are leasing space "and smaller tenants, the lifeblood of the office sector, are back."
Jay Spivey, CoStar senior director of research and analytics, said that the office recovery, while not feeling very strong so far for many landlords and investors, is actually much stronger than the recovery in the office market following the collapse of Internet companies and real estate downturn 10 years.
"We have seven quarters of positive growth, and at that same point 10 years ago, we were still seeing negative absorption," Spivey said.
Concessions Starting to Disappear
With improving occupancy and little new supply, concessions like free rent and tenant improvements are burning off in some markets and overall, the long downward slide in average office rents has likely bottomed.
CoStar sees significant upside in office rents, which are currently 11% below their long-term trend, Page said. With office construction at an all-time low, rents will rise and are expected to reach their long-term average between 2015 and 2017.
The analysts singled out "premier" suburban areas located near the urban core in markets such as Bethesda, MD, and West Los Angeles are seeing net absorption recover much more quickly on a rolling annual average compared with CBDs or outer suburban areas. Likewise, a survey of four- and five-star buildings in CoStar’s new Building Rating System, the equivalent of the top Class A properties, shows that the best buildings are absorbing most of the space. One- and two-star buildings, typically Class C, were hammered during the recession and are recovering more slowly.
While national vacancy and availability rates are both trending down, there are vast differences within metros and within the CBD and suburban properties in those markets. In Miami, for example, the CBD vacancy rate is about 22%, while suburban and premier suburban rates are lower. By contrast, Atlanta’s Buckhead premier office suburb, where much new construction came on line as the recession hit, has the highest vacancy at over 20%, more than 6 percentage point higher than the Atlanta CBD.
Investors Explore Secondary, Suburban Markets for Deals
The return of portfolio sales outside the largest markets in 2011 shows that investors, who largely retreated to the safety of well-leased properties in safe core markets like Washington and New York over the last couple of years, are ready to assume risk in certain transactions, with the help of a slowly returning flow of debt financing.
Distressed sales volume as a percentage of total office sale transactions fell during 2011. As distress has abated, prices have begun to rise over the last couple of quarters, spreading from investment-grade properties to smaller general commercial sales, according to the CoStar Commercial Repeat Sale Index (CCRSI).
Pricing has risen in most markets and is approaching replacement cost for some buildings, Spivey noted. Higher occupancy buildings are fetching a higher price premium currently than in 2007, possibly opening a window for investors on opportunities in select vacancy challenged properties.
Office space absorption doubled during 2011 as the office-using job base expanded and vacancies declined across nearly two-thirds of U.S. submarkets, CoStar Group reported this week in its Year-End 2011 Office Review & Outlook. The report presented to CoStar clients found that positive momentum in office fundamentals and the continued absence of new construction is expected to result in higher rents for building owners over the next few years.
Office sales increased steadily through 2011 over the previous year as investors sought to get ahead of the curve, with investor interest spreading beyond the safer well-leased investment-grade buildings in top-tier markets and into smaller properties and second-tier markets such as Seattle, Atlanta and Northern New Jersey. Total fourth-quarter 2011 office sales are likely to match or exceed fourth-quarter 2010’s impressive $25 billion once all sales are tallied.
Total CRE sales, which evened out in 2011 across all property types, is estimated at nearly $300 billion, the highest since the peak of the real estate boom in 2007, and well above the historical average of around $220 billion since 2000.
Although office tenants continue to hold the cards in many markets, (see related topic:"Renew or Relocate? Incumbent Landlords Willing To Sweeten the Pot") CoStar reports the outlook appears to increasingly favor building owners in coming years as the cycle continues.
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"To sum it up, for the office market, we’re just now getting started. Now is a good time to be an office investor," said Walter Page, director of research for Property and Portfolio Research (PPR), CoStar’s analytics and forecasting division. "We expect vacancy to continue to decline through 2015, and when you have declining vacancy rates, you can raise rents, returns are better, and for an investor, that’s good news."
Economy Shows Positive Signs For CRE
CoStar Group founder and CEO Andrew Florance noted that, although overall employment growth has been anemic, the U.S. posted a solid 1.7% gain in office-using jobs, led by technology and energy markets such as Seattle, Boston, San Francisco and Dallas.
Other positive signs abound, including a leveling off in the loss of manufacturing jobs and a bottoming of the housing market, which should be less of a drag on the economy going forward, and likely to be the source for new jobs as replacement demand for single-family and apartment housing fuels expected construction demand.
Meanwhile, corporate profits are off the charts, from $800 billion in 2000 to $2 trillion in 2011.
"Coupled with low interest rates, companies are in a position to invest aggressively in new facilities and equipment. From a CRE perspective, Corporate America is well positioned to invest in their businesses, plant facilities and equipment," Florance added.
Challenges remain, including relatively weak consumer confidence, continued high unemployment, a record federal budget deficit and economic upheaval in Europe. Occupancy recovery varies widely between metros, with "have" markets such as supply-constrained New York City showing 7.4% vacancy and housing bust "have-nots" like Phoenix lingering at a stubbornly high 20.7%.
However, CRE values have recovered to roughly 2000-year levels, and vacancies declined across the country last year. In a strong indicator of an impending office rebound, vacancy rates declined in 63% of the 2,400 office submarkets tracked by CoStar. That’s the strongest number since 2004-05, which roughly marked the beginning of the last CRE up cycle.
In the fourth quarter, CoStar recorded 18 million feet of net absorption, which drives occupancy rates and other leasing fundamentals, and a total of 49 million square feet for the year, doubling 2010’s absorption.
Despite rising concerns about the darkening economic picture that started last spring and continued through the year, absorption rose sharply in the second half of 2011, said Page, noting that companies are leasing space "and smaller tenants, the lifeblood of the office sector, are back."
Jay Spivey, CoStar senior director of research and analytics, said that the office recovery, while not feeling very strong so far for many landlords and investors, is actually much stronger than the recovery in the office market following the collapse of Internet companies and real estate downturn 10 years.
"We have seven quarters of positive growth, and at that same point 10 years ago, we were still seeing negative absorption," Spivey said.
Concessions Starting to Disappear
With improving occupancy and little new supply, concessions like free rent and tenant improvements are burning off in some markets and overall, the long downward slide in average office rents has likely bottomed.
CoStar sees significant upside in office rents, which are currently 11% below their long-term trend, Page said. With office construction at an all-time low, rents will rise and are expected to reach their long-term average between 2015 and 2017.
The analysts singled out "premier" suburban areas located near the urban core in markets such as Bethesda, MD, and West Los Angeles are seeing net absorption recover much more quickly on a rolling annual average compared with CBDs or outer suburban areas. Likewise, a survey of four- and five-star buildings in CoStar’s new Building Rating System, the equivalent of the top Class A properties, shows that the best buildings are absorbing most of the space. One- and two-star buildings, typically Class C, were hammered during the recession and are recovering more slowly.
While national vacancy and availability rates are both trending down, there are vast differences within metros and within the CBD and suburban properties in those markets. In Miami, for example, the CBD vacancy rate is about 22%, while suburban and premier suburban rates are lower. By contrast, Atlanta’s Buckhead premier office suburb, where much new construction came on line as the recession hit, has the highest vacancy at over 20%, more than 6 percentage point higher than the Atlanta CBD.
Investors Explore Secondary, Suburban Markets for Deals
The return of portfolio sales outside the largest markets in 2011 shows that investors, who largely retreated to the safety of well-leased properties in safe core markets like Washington and New York over the last couple of years, are ready to assume risk in certain transactions, with the help of a slowly returning flow of debt financing.
Distressed sales volume as a percentage of total office sale transactions fell during 2011. As distress has abated, prices have begun to rise over the last couple of quarters, spreading from investment-grade properties to smaller general commercial sales, according to the CoStar Commercial Repeat Sale Index (CCRSI).
Pricing has risen in most markets and is approaching replacement cost for some buildings, Spivey noted. Higher occupancy buildings are fetching a higher price premium currently than in 2007, possibly opening a window for investors on opportunities in select vacancy challenged properties.
Saturday, January 21, 2012
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Wednesday, January 18, 2012
Sunday, January 15, 2012
Tuesday, January 10, 2012
Need To Sign Tenants? Contractors Can Help Land Deals.
In this day in age when tenants are shopping buildings around like it's Christmas, building owners and managers have to use every tool at their disposal to try and ink a deal. Rent rates are so highly competitive and buildings are so starving for cash flow that tenants know that they have the upper-hand in shopping for a space. So what type of competitive advantages can building owners/managers do to seduce companies into their buildings? Of course your building should show its best when walking potential clients through. Doors should be wiped down clean, lobby's should be updated to show that their is care and investment in the building, and a clean space plan that is ready to be marked-up is always helpful.However, a tool that is under-utilized is involving a trusted contractor early in the process when there is construction involved. The contractor can not only help with budgeting, but can offer solutions to lower the cost for the build-out, provide material samples that will help create a physical connection to the space, and even help sit down with all parties to design the space (which is an opportunity to create an emotional connection).
There is no doubt that deciding on a space by both parties is mostly about the square foot numbers, allowances, building location, existing tenants, etc. However, contractors can be a great tool to create different kinds of connections that are more than black & white.
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