So maybe Beyonce won’t sing you a little ditty in a shimmering gold outfit like in that DirecTV commercial, but if you’re considering new office space, now is the perfect time to upgrade.
With more landlords offering incentives to counter the financial crisis and maintain occupancy rates, growing businesses — or even ones with expiring leases — should be able to land a beauty of a deal.
David C. Wagner, principal of the Chartwell Group, a full-service commercial real estate firm in Cleveland, is seeing a variety of incentives that grow sweeter depending on a business’ access to cash. These often include free or discounted rent to ensure longer-term commitments to their buildings.
“Overall, owners and tenants are trying to get creative in this challenged market,” Wagner says.
With so many companies trying to reduce costs, maximizing real estate represents an ideal way to save. And there are ample opportunities for commercial tenants to upgrade their current offices, says Wagner, since Class A space is now being leased at Class B prices.
For example, though Cleveland’s overall downtown occupancy rate remained flat between the third and fourth quarters of 2008, the vacancy rate for Class A spaces downtown declined significantly — from 13.9 percent in the third quarter to 12.80 percent by year’s end, according to a Colliers Ostendorf-Morris market report. However, during that same period rates slipped from $19.95 to $19.87 per square foot on downtown’s Class A space.
During the past 12 to 18 months, Northeast Ohio has seen a definite shift from a landlord’s market to a tenant’s market, say local experts. “Early last year, it was getting very expensive to build out space,” says David M. Browning, managing director of CB Richard Ellis, in Cleveland.
The price of oil and other raw materials, for example, were driving up costs. “The recession has changed all of that, dramatically reducing the cost to build out space,” he adds.
That means there are excellent opportunities to save, especially when a company is purchasing or leasing new space and needs to modify it, offers Bill Saltzman, a senior vice president at Grubb & Ellis Co. of Cleveland. Tenants can take advantage of those cheaper construction costs and aggressive general contractors who are willing to take a sharp pencil to their fees to get projects underway.
“Generally, construction costs are down,” explains Saltzman. “So if someone is looking to kick off a project or do a ‘build to suit,’ there are more opportunities for those companies who had perhaps been on the sidelines.”
In many cases, landlords are also approaching tenants earlier — or are open to tenants approaching them early — to renegotiate and adjust leases, since it’s more cost effective for landlords to retain existing clients than search for new ones.
Typically, giving tenants a reduced rental rate or square footage total is nearly always preferable to losing rental income and taking on the liability of vacant space.
In addition to free rent for a month or reduced rent, owners are offering incentives from increased tenant-improvement allowances to reduced security deposits.
Business owners should re-evaluate their lease documents and reassess their occupancy needs and costs, Saltzman advises. Engaging the services of a professional real estate broker may also help evaluate where a company’s occupancy costs fit with the current marketplace, since there are opportunities that didn’t exist just 12 months ago.
“It’s certainly a great time to take advantage of the marketplace by extending your lease,” Wagner adds. “Your chances are good to enjoy some current-year financial benefits as well, whether it’s a month of free rent or other incentives to sign a longer-term lease.”
Moreover, in the competitive effort to attract and retain businesses — and ultimately bolster their tax bases, many communities are proffering public sector incentives for companies considering relocating or expanding, including tax abatement provisions.
The city of Cleveland, for example, has attractive low-interest loan programs, and in some cases, a certain percentage of that loan is forgiven, acting in effect as a grant to that
company.
Wagner points out another bit of good news for tenants: When Congress passed the recent economic stimulus package, it incorporated the extension of a favorable tax provision that provides an accelerated depreciation component for tenants.
Thus, if a tenant invests money in office space in 2009, the company can write off up to 50 percent of that expenditure in the first year.
“That tax provision is a nice feature,” Wagner says. “That should really spur people to buy space and put improvements in this year.”
Companies are also cutting costs by subleasing some of their existing office space. In the midst of layoffs and other cutbacks, businesses may have extra space just sitting there. So some companies are exploring the subleasing option as a way to recover part of lease expenses and as a cost-effective alternative to relocating.
Wagner says his firm recently performed a significant sublease deal in the Lake Point Office Tower in downtown Cleveland. The client has “sworn them to secrecy” because it was such a good deal.
“Obviously, if a company is subleasing, they don’t necessarily want to promote that, because they don’t want to be viewed as financially challenged or weak in their field,” Saltzman explains. “There are definitely opportunities.”
Another reason to work with a commercial real estate professional during your search is that they often hear about what Saltzman terms “whisper opportunities,” those deals done without any public promotion.
For healthy companies, this is an exceptional time to consider commercial real estate moves.
“This recession might be painful for a lot of people,” Browning says. “But the substantial real estate improvement opportunities available to businesses make it one of the most fascinating transition periods I’ve seen in my 30-year brokerage career.”