Economy: Leasing Observations in a Down Cycle
- Mar 24, 2009
Tamara Kos, a colleague in our office who specializes in leasing representation for owner clients in downtown Chicago, shared with me some interesting recent observations as follows.
As we all know and as we are all aware, the recent events in the capital and financial markets have drastically impacted businesses and their decision making process. What has been unusual about the recession of 2008/2009 has been its significant impact on virtually every industry, and we are seeing very high levels of workforce job losses so early on in this business down-cycle.
As a result, many businesses have been delaying earlier plans to expand, relocate or upgrade the location or image of their facilities. At present, both the investment sales markets and leasing velocity has slowed considerably as a result of corporate America “treading water” during these current uncertain economic times.
This has created an interesting dichotomy however, for owners of commercial office buildings. With many tenants delaying their plans for long term commitments, they are seeking instead to renew in existing locations for shorter terms of one to two years, to give them time to better evaluate their longer term need for space while the market is in turmoil. For landlords of existing buildings with reasonably high levels of occupancy, this has actually been a boon to net revenue generation. The short term renewals that are being consummated are typically at the full asking rents in a building, but with minimal to no concessions such as tenant improvement allowances or rental abatement. Interestingly, from a bottom line perspective, these short term leases are favorable given their lack of costly concessions although they do not add to the long term value of the building.
On the flip side, owners of properties looking to add tenants are in the position of competing for a smaller pool of tenants who will actively consider a new location and longer term lease commitment, and as a result, the concessions necessary to secure these tenants has increased measurably. Until more confidence is felt in the overall economy, this cycle will likely continue.
So despite the challenging times, the current economic trend has lent an unusual benefit to the owners of those buildings that are well leased and positioned, where many tenants are committing to renew, although for shorter lease terms in many instances.