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Entries Tagged as 'Office Space Negotiations'

Shadow Office Space and the Office Market Recovery

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Over the past nine months we have made numerous posts on the effect that shadow office space will have on the office space market recovery. In a recent article from CNBC some numbers show the effect that shadow office space will have on the market. According to Co-star shadow space is adding as much as 7 percent to the Los Angeles office vacancy rates and over 6 percent in Chicago. This is likely to be the case in most markets. The problem with shadow office space is that before the market can see a full recovery, shadow office space will need to be absorbed.  Typically, shadow office space is space that a company still has under lease, but is not in use. Before these companies who have shadow space will go out into the market to lease additional office space, they will need to fill their shadow space.

Additionally, Grub and Ellis is predicting that as the market recovers shadow space will account for about 1/3 of the increased demand in 2011 and 1/4 of the office space demand in 2012, thereby dampening the office space market recovery. The good news is that we are starting to see positive absorption. As the jobs come back, the office market will improve.

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Chicago Office Space , Los Angeles Office Space , Office Rental , Office Space , Office Space Negotiations , Office Vacancy Rate

Profits and Pitfalls of Subleasing

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The article below is one that I wrote in February 1993.  I found it interesting that it still holds true not only for the Seattle are, but most office markets, too.

Almost 20 percent of the vacant office space in Bellevue and Seattle is available for sublease. Massive corporate restructuring, downsizing and mergers mean that many Puget Sound firms need less space than anticipated. Yet they find themselves locked into expensive long-term leases. It makes a lot of sense to find a way to recoup on space that would otherwise stand empty.

Even at 20 percent, sublease space in the market is underestimated. When any space is vacant or is soon to be available due to a pending move, it is included in our vacancy rate analysis. But often sublease opportunities are poorly marketed and publicized. Space with less than one year remaining in the lease is often not marketed at all. So tenants willing and able to relocate and go through the complications of a sublease transaction will find plenty of attractive possibilities around town.

"Attractive" is not a word you would hear from building owners, who often view subleases as bad news. Rates are typically at least 15 percent lower than direct leases. An owner therefore finds himself competing with existing tenants for new tenants. It's an uphill battle, because the landlord is usually at an economical disadvantage.

Rental rates for sublease space in some of the newest buildings in downtown Seattle, for example, can run as little as $12 per square foot, complete with full service. This is a whopping one-third savings over the average downtown rate of $18 for similar office facilities.

Garth Olsen of Cushman & Wakefield, leasing agent for the remaining 100,000 square feet of AT&T sublease space in the AT&T Gateway Tower downtown, says that his firm is asking between $14 and $15 per square foot. This includes a generous tenant improvement allowance with a lease that runs through the year 2000.

On the other hand, the landlord has a starting price of $18 per square foot. The building is only 54 percent full after two and a half years. Having to compete against your major tenants to lease space adds insult to injury.

Getting a Good Deal

Despite the obvious economic benefits, there are some challenges in negotiating a wise sublease. If costs were equal, it would be more desirable to deal directly with a landlord than to sublease, since there are fewer risks and complications involved. Direct lease space negotiations are two-way between landlord and tenant. In a sublease arrangement, however, transactions become three-way, with all the inherent pitfalls of any triangulated relationship. "In most leases, the original tenant is still ultimately liable for rental payments, even after the space has been subleased," said Craig Michalak, a prominent Eastside broker. "If the subtenant pays less than the face rate of the original lease, the original tenant must make up the difference." He points out that the subtenant, in turn, needs to be concerned with the financial stability of the original tenant. The subtenant may find themselves stuck making overage rental payments, or could end up with default problems that cannot easily be cures. In a worst-case scenario, they could be forced to move.

For companies like the Hogan Company, a Bellevue communications firm, subleasing 7,800 square feet of office space for the past three years has been a good decision. "I looked at everything available that was the right size for us," said Walter Hogan, president. "My final decision was based on cost. We were able to move into our space as is, and saved more than 20 percent over doing a direct deal. I'm very pleased with how everything worked out, and highly recommend a similar arrangement to others."

Hogan was lucky. It's unlikely that the layout and site of an office will exactly match a new tenant's needs, especially in offices greater than 5,000 square feet. When the space can't be used as is, an appropriate allowance for tenant improvements needs to be included in the sublease. Otherwise, the 'financial benefits of a reduced rental can quickly vanish. A typical downtown tenant improvement allowance is around $25 per square foot. Using a 10 percent annual interest rate over a five-year lease amortizes to $6.37 per square foot per year in rent. In other words, more than $6 of each rental payment goes to help the landlord payoff tenant improvements. When the remaining term is less than three years, these expenditures can cause the effective rental cost to increase significantly if the tenant has to foot the bill. What seemed at first glance to be a good deal becomes a very expensive proposition.

Remaining terms of less than two years are the norm for sublease space. But spaces offered by major users often have remaining terms and expansion options that reach well into the next century. In these cases, it's worthwhile to calculate very carefully the pros and cons of various tenant improvement options. Long-term subleases can make sense even when the subtenant ends up paying for improvements. When improvements are amortized over many years, the results of a sublease can become much more beneficial than anything that could have been obtained directly through the landlord.

Two of the larger companies in town with large amounts of sublease space available are AT&T, with 100,000 square feet, and Seattle First National Bank's Security Pacific Bank space, with 200,000 square feet. AT&T's space became available due to a reorganization of the company's work force. SeaFirst's space is the result of their well-publicized merger with Security Pacific Bank. Both leases have a long time to run...;, about seven and a half years for AT&T, and about 25 years for the bank. In SeaFirst's case, there is little probability of finding firms willing to commit for a quarter of a century. So they can be expected to be flexible on the length of term for subleases.
SeaFirst is in the process of finalizing their leasing strategy and selecting a leasing representative. They have already done well, subleasing 150,000 square feet of their original 350,000 square feet to West One Bank and other smaller subtenants. SeaFirst views their property more as owned than as leased. They have therefore decided not to disrupt the market by undercutting prices for competitive space. In other words, they are taking a long-term ownership approach, rather than opting for a quick fix that could result in both hard feelings and financial drawbacks in the long run.

Outstanding opportunities await any business owner willing to consider subleasing space. But risks are certainly present too. Anyone interested in investigating subleased property would be wise to consult a real estate professional as well as an attorney; to make sure that the deal is really as good as it looks.

Office Leasing Tips , Office Rental , Office Space , Office Space Negotiations , Sublease Office Space

Keep Your Office Space Healthy

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One of the normal New Year's resolution everyone makes has to do with their health; lose weight, stop smoking, exercise more and a whole slew of others. How about one for making sure your office environment is healthy?

Making certain your office space is healthy is important to productivity and well being of everyone working in the space. If you are planning to move into a new office space, check for health hazards when selecting a location. Check your present office space to be certain it is a healthy work place.

If you notice a reduction in productivity and increased sickness without any clear explanation, this is a sure sign that you need to carefully check you office workspace for hazards that can be corrected, preventing continuing problems. Perhaps you notice that you seem to be getting “bug” more often than in the past. These are signals which require action to correct.

Here are a few of things to check to be sure your office space is healthy:

Lighting: An office space needs the correct lighting. If employees work in poor lighting, the eyestrain can cause chronic headaches as well as mistakes in work due to inability to read clearly. Lighting that causes eye stress can make you feel tired more quickly and reduce production.

Ergonomic Office Furnishings and Training: You and your colleagues may spend many hours sitting in desk chairs and working at desks. Choosing desk chairs and computer workstations that are ergonomically designed can prevent back problems, repetitive motion problems such as carpal tunnel syndrome. Working at a computer keyboard that is either too high or too low stresses the shoulder and upper back muscles which can, over a long period of time, cause damage to the body which can result in lifelong chronic pain or require surgery. Employees should attend a class or presentation that presents the best use of ergonomics such as sitting up straight, taking breaks periodically, adjusting chairs to best fit the body.

Clean Environment: Old buildings that have had poor maintenance have proven to develop sick building syndrome that causes frequent illness in humans. Air vents and ductwork should be professionally cleaned every few years to ensure there is no mold. Break rooms or kitchen areas should be kept clean to present illness transfer. Employees should be provided with antibacterial soap and hand wipes in the bathrooms and encourages the use of these items.

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Office Space , Office Space Design , Office Space Negotiations

What does a Tenant Rep do?

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The following is from our OfficeFinder LinkedIn group discussion on the most importnat activities Tenant Reps provide their clients on addition to just finding space:

boston tenant repI believe the top Time & Money saving services that we provide to clients all revolve around the Transfer of Specialized Knowledge to the client, so that they may make the most informed decision. Up to date market information, understanding the players involved, defining and executing the process required for a successful outcome and most importantly, proactive advocacy, each individually represents significant savings for a client.
Mike in Boston

 

Tenant RepAvoiding mistakes is another important aspect of why tenant representation is so important for office tenants. We do this every day, just like the landlords and listing agents. Tenants only search and negotiate for office space every few years. Landlords and listing agents love to see tenants coming unrepresented. It makes their business much more profitable than when a tenant is represented by experienced and knowledgeable tenant reps...like the ones we have at OfficeFinder!
Jim - OfficeFinder Founder

 

St louis Tenant Rep We provide lease digests and early reminders of important dates i.e. rights and renewal options. We also place these dates on an earlier call up internally so that we remind the tenant that they need to be addressing their real estate needs, even if their intent is to renew. We also assist with renewals. In today’s market the lease signed five years ago is most likely far above today’s market rates.

A 10% discount off of today's asking rate may sound good however, the market may be giving a 25% discount. Only through the use of their own broker can a tenant gain an accurate opinion of today’s market.

Any business who leases office, retail or industrial space expiring within the next 6 to 18 months should be talking with a broker to represent their interests. This not only pertains to renewals subject to negotiation but also pre-stated rent renewals. This is also a good time to negotiate terms and conditions not included in the original lease.

We have a good system in place and when started at the right time in the renewal process, we have been successful in leveraging our position, procuring rent reductions and changes in other terms beneficial to the tenant. We've also been able to facilitate early renewals where the tenant benefits from the negotiated terms and conditions sooner than later.

Lynn in St Louis

Orange county Office Tenant repThere is no question as a tenant representative we can all save our clients real money in the transaction and "time" money by not only doing things they would have to do but also the fact we know what to look for in the first place.

We might want to consider the money we can save clients by handling non-transactional issues after the lease is signed. Two examples: 1) client is a 501C-3 teaching museum- eligible for property tax relief. Worked with county and LL-client received over $100K in refunds over 12 years. 2)Client located in Enterprise Zone. Another client/accounting firm specializes in that area of tax. Put them together...anticipate over $500K in saving over next 6 years. There's a lot more we can do than just focus on the transaction. Just my $.02 :)
Jerry in Orange County, Ca

Office Leasing Tips , Office Space Negotiations , Tenant Representation

Five Years Before Office Space Market Recovers?

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In  a recent Blog post by James Quinn, a senior director of strategic planning for a major university, the time period of the office space market recovery is questioned and predicted to be much longer than many industry experts predict.  The main reason for his prediction is his belief that consumers are beginning to "Deleverage," spending less, and it will cause major changes in the economy over the next decade.

"They have no choice. Boomers have come to the shocking realization that you can’t get wealthy or retire by borrowing and spending."

His thoughts on the Office Space market:

"The current office vacancy rate of 17.5% is the highest since 1993 and is just below the all-time high 18.7% in 1992. The WSJ has concluded, with no data or analysis, that the vacancy rate has bottomed. As the employment data proves, companies are not hiring employees. New companies are not being formed. Government mandates and regulations regarding healthcare and uncertainty about taxes will keep the formation of new small companies at a minimum. Conglomerates continue to ship jobs overseas. Part 2 of this Depression will drive more companies out of business. Office vacancies will remain at record levels for the next five years."

On the other side the Wall Street Journal came out with an article, Signs of Recovery For Office Market, last week that predicts that the office space market has bottomed out and that we are starting see some stabilization in the market. They also state that the recovery will be a slow one, but don't define how long that could be.

For us at OfficeFinder.com, over the past 3 weeks we have seen a surge in closed deal reporting in the neighborhood of 2 - 3 times over those of the previous several months. These reports come through our network of office space tenant representatives and executive suite members. We are hoping this continues and identifies the start of the small business recovery.

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Commercial Real Estate , Lease Negotiations , Office Rental , Office Space Negotiations , Office Vacancy Rate