Tenants Finally take Lead in Office Leasing

The only good news in the commercial real estate industry when it comes to office space is for remaining tenants.

In 3Q09, owners rolled out lease concessions to entice tenants to renew or sign new leases with “gifts” such as free rent, lower base rent and higher TI allowances. And for now, tenants are happy to be “king” of the CRE industry.

Like all good kings, tenants are using their leverage with landlords to score higher-quality space at more attractive lease terms. What king wouldn’t want a swanky pad to reside in at half the price?! The only uncertainty for their throne, however, is their kingdom’s time at the top of the pile.

CoStar announced their forecast for the office market sector on November 11. Market statistics and forecasts included:

• National office vacancy rate stood at 13% at the end of 3Q09. CoStar forecasts the rate will rise to 16% within a year, while pent-up negative net absorption will continue to plague the market and undermine rents as companies set up their consolidation of leased space, due to job losses.
• Strong demand for office space is not expected to return until 2011-12. When the market sector does pick up, the national office vacancy rate is expected to fall to 10.5% by 2014 – if job numbers pick up as expected.
• Rents will continue to decline through late 2010. Two years of decelerating decline will be followed by modest rent growth in late 2012 or early 2013.
• Net operating income will continue to drop in 2010 through 2012, falling as much as 9% in 2011.

For now, tenants will enjoy the landlord’s plague as long as they can, while the rest of the CRE industry waits to see who’s crowned king when things start to hit equilibrium.

www.costar.com