Office Landlords Firmly in the Driver’s Seat

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drivers seatLast week I watched an Office Market Recap and Forecast webinar by Costar (my industry’s equivalent of MLS).    The Costar analysis should be cause for celebration for the beleaguered office landlords who, for years, have been at the tenants’ mercy.   Costar is saying that the cycle is clearly demonstrating a turn towards the landlords’ advantage finally after more than five years. 

Here are the main takeaways:

  • Job growth nationally was very good at 2.5% versus their prediction of 1.6%. This equates to an additional 750,000 jobs nationally. 
  • They believe that we are halfway through the recovery.  This means that office landlords are seeing rent gains which leads to asset appreciation. 
  • Costar also sees rent concessions in the form of free rent and Tenant Improvement Allowances cut in half.  This leads to a higher effective rent for landlords and rising costs for tenants. 
  • Year over year change in rental rates for Miami is a 2.2% increase.  Compare this to San Francisco, the national leader, with an 11.9% increase. 
  • In addition, year over year rent change for a tenant’s renewal showed that Miami had a 3% increase in rent.  Not something tenants want to hear, but it’s far better than the 30% rent growth in San Francisco and the 11% rent growth in Houston.

 The other trend that Costar found interesting was that tenants are still moving into quality buildings.  We call this the flight to quality. They thought that as the rents increased, this trend would subside, but it hasn’t.  As someone with boots on the ground, I rarely find tenants who are willing to accept status quo or downgrade their space when it comes time to move.  Typically, if a company is going to proceed with the hassle of moving, they want to make it worthwhile by taking the opportunity to upgrade either significantly or modestly. 

Nationally the suburban markets are leading the way in net absorption of vacant space.  costar_logoThe suburban markets account of an astonishing 90% of the 2013 absorption of office space.  Costar, and I agree, believe this is because technology and healthcare companies tend to be in suburban areas.  Miami has been bucking that trend.  Most of Miami’s 2013 absorption occurred in Downtown/Brickell (also known as Central Business District or CBD in my world), which caused Miami to be the third highest city of CBD absorption.

Miami was also noted as having, according to Costar, the largest construction project in the country with the Brickell Citi Centre project coming in at over $1 Billion in cost.  Interestingly enough, this mammoth CBD project is only planning on 100,000 sq ft of office space. 

My analysis:  if you are a tenant, begin your renewal process early.  Allow yourself ample time, typically a minimum of a year.  In this rapidly changing environment, you’ll need the advice of a good tenant rep broker (like me), to help you navigate through this.

If you are a landlord, make sure that your building is up-to-date so you can drive rents and attract new tenants.  I’m an expert at re-positioning assets, so let me help you structure a new leasing/marketing approach that will take advantage of the current market conditions.

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