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With office vacancy rates in downtowns across the country reaching
their highest levels in five years, according to the real estate
services firm Cushman & Wakefield, tenants are seeing opportunities
and exploring options.
Tenant choices abound simply because office vacancy rates, both
in downtown and in the suburbs, are extremely high by historical
standards. Depending on which commercial real estate company you
ask, the overall vacancy rate at mid-year ranged from 14.5 percent
(Insignia/ESG) to 19.6 percent (Coldwell Banker Commercial).
In St. Louis, tenants are taking the opportunity to upgrade space
or reduce rents. “This is a tenant’s market,” says Greg Nooney chairman
and CEO of Coldwell Banker Commercial.
Typically, when a tenant’s lease comes up for renewal, he hires
a tenant rep broker, who searches a database to see what vacancies
there are, and which ones have space configurations that best meet
the tenant’s needs with minimum work. The broker then goes out in
the market, gets multiple offers, “then goes back to the landlord
who usually gets competitive... Now, there is so much space out
there, landlords are willing to cut good deals. In most cases today,
it will take a cut in rent if a lease comes due that was negotiated
18, 24 months, or three years ago,” Nooney says.
Many landlords don’t want to cut rents, which will depress the value
of the building, particularly if they might want to sell it when
the market rebounds. Instead, they have two other big inducements
to offer: free rent for three, four, or five months; and, perhaps
even bigger, an improvement allowance.
There are buildings on highway 40 offering five months free rent
on a five-year lease. West County, North County and St. Charles,
all hot markets just two years ago, now have some of the highest
vacancy rates in the region. Coldwell Banker Commercial reported
that office vacancy rates in West County and North County both were
more than 21 percent at mid-year, while in St. Charles they were
approaching 30 percent. In new buildings, it is even worse. James
Koman reports himself very satisfied that his new building in Creve
Coeur, CityPlace III, was 35 percent leased, comparing that with
new buildings on highway 40 that he says were 100 percent vacant.
Among established highway 40 properties, “nominal rents are down
only 5 to 10 percent, but tenants getting five months free,” says
Tim Balk, senior sales and leasing associate, Follman Properties-ONCOR
International. Even though lease rates haven’t dropped, the free
rent gets the average rent down. “If you have a $23.50 per square
foot building and give five months free, that brings the average
rent down to $21.69, but it doesn’t devalue the building.” If you
want to sell in a year or two, the free rent is used up and the
building’s income is the same as if you never made any concessions.
Those same landlords also are having to pay more in tenant improvement
allowances, which is the amount a tenant can deduct for building
out the interior to suit his needs. In busier days, landlords tried
to hold to an improvement allowance of $11 to $12 a square foot,
“but deals are being written today for $20 to $25 a square foot,”
Nooney says.
In choosing between buildings in similar locations, “you have to
consider the tenant improvement allowance, and in this market you
can get a moving allowance or money for cable and wiring needs,”
Balk says.
Another opportunity for tenants lies in subleases. While Nooney
says subleases are not attractive because you are bound by the terms
of the original lease and cannot get a tenant improvement allowance,
Balk says that is not entirely true.
What is attractive about subleases is that the rate is very low,
Balk says. “In Maryville, where rates normally are $25 a square
foot, there are subleases in the $12 range.” And, since there are
so many subleases out there, “you can find the term you would be
looking for in a direct deal—a lot of subleases are three-to-five
years—and in some cases negotiate free rent for the cost of reconfiguring
the office.”
Balk says the big negative to a sublease in a location such as Maryville
is that, when the lease comes up, “chances are you will not renew
there because it will not be affordable.”
With all the opportunities that free rent, lower lease rates, and
subleases offer, tenants investigating new space are looking outside
their traditional submarkets. Tenants who have always been in Clayton,
for example, are considering downtown and the suburbs. And “we are
seeing a tremendous amount of Class B tenants upgrading to Class
A space,” adds Jack Reis, managing director of commercial real estate
firm Insignia/ESG’s St. Louis office.
Perhaps more surprising, many tenants in this market are considering
options other than leasing. They are considering buying or building.
As the office market has softened, the cost of construction has
fallen, whether because the cost of land has fallen, or development
fees have fallen, or interest rates are lower.
Cost, however, is only one of the variables firms look at in deciding
whether to move. Other variables include location, with respect
both to where one’s customers are and where one’s employees are;
the kind of image a company wants to project, the caliber of the
building, and so on. Those same variables enter into the decision
regardless of whether a firm is considering leasing space, buying
an existing building, or constructing a new one. The key thing is
for tenants to have choices.
This is not all bad news for landlords. Compared to the national
market, St. Louis is a very levelheaded, conservative marketplace
that doesn’t have a lot of peaks and valleys. It never gets unbearable
for either tenant or landlord. Yes, there are free rents, lower
rents, higher tenant improvement allow-ances, and offers in some
cases to compensate for relocation costs, but all the stars have
to line up for the landlord. It has to be a good tenant, a good
fit with the building with prospects for growth, who comple- ments
existing tenants, and who might draw other tenants.
Peter Downs is a St. Louis-based freelance writer. |
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