Tenants Rule Roost
Landlords labor hard to fill offices
BYLINE: PERALTE C. PAUL
Staff
DATE: September 12, 2003
PUBLICATION: Atlanta Journal-Constitution, The (GA)
EDITION: Home; The Atlanta Journal-Constitution
SECTION: Business
PAGE: D1
Office renters, take note from the lesson learned last year by your residential counterparts: The market is yours to price.
More than two years after the triple whammy of 2001's tech-stock crash, the terrorist attacks and the subsequent maelstrom of blue- and white-collar job losses, office rents remain at near bargain-basement prices.
Want a few months' free rent? Not a problem. Need some funds to help you move your office equipment and furniture? Sure. How about an allowance to help you decorate the office space of your dreams? No sweat.
One North Atlanta public relations firm searching for new digs said it's received a lease offer as low as $10 per square foot. That's little more than a third of what it cost in the heady days of the late 1990s dot-com boom.
Brokers and tenant reps are being wooed, too. Some brokers report offers of free weekend getaways to golf resorts, gift certificates and dinners just for bringing clients around -- even if it doesn't end in a deal.
Why are so many commercial property managers and owners so accommodating?
"Too much space chasing too few deals -- prices go down," said Michael H. Shelly, executive vice president of Richard Bowers & Co.
Shelly's company has an ownership stake in 260 Peachtree St., the former Coastal States building just off Harris Street downtown.
The 27-story office tower has leased 105,000 of its 305,000 square feet of space and is offering enticements such as discounted rent and increased design allowances.
"It's been a tenant's market," Shelly said. "Nobody can really justify not doing it. It doesn't make sense not to offer concessions to renters."
The trend mirrors what so many metro area apartment owners found last year as tenants fled from rentals, either because they lost their jobs or because low interest rates made homeownership and mortgages more affordable.
Low interest rates have helped commercial and industrial property owners offset some of their largesse. Refinancing their building debt lessens the cash flow crunch as office and industrial property owners ride out this current down cycle.
"Interest rates have been very helpful to the owner," Shelly said. "But I wouldn't say that they've offset rental erosion in terms of vacancy rates."
Where commercial office tenants may have been paying as much as $27 per square foot on a long-term lease, they can renegotiate that down to $23 now or lower, even with as much as two years left on a lease, some brokers say.
"A couple of years ago they wouldn't do that," said John Poulos, vice president at broker Grubb & Ellis. "They'd let your lease run out and renegotiate at a higher rate."
Now, almost 30 percent of his lease deals are these so-called recasts or renegotiations.
"I think the concessionary marketplace is going to remain for at least another year," said Sam Holmes, vice chairman of CB Richard Ellis and one of Atlanta's top office brokers.
Among the worst
To be sure, commercial real estate is a cyclical business. But brokers and building owners say the current down period is among the worst they've seen in years.
About 30.7 million square feet of office space in metro Atlanta sat empty in the second quarter -- the highest since 1992, according to Cushman & Wakefield.
That's 24.6 percent of metro Atlanta's total office space of 125.1 million square feet.
"In a good year, the [vacancy] range is 5 million to 6 million," said Mike Elting, Cushman & Wakefield's senior managing director. "But without job growth, we don't have the absorption of space."
The picture's not much rosier for metro Atlanta's industrial market. More than 63.4 million square feet, or 14.5 percent, of the 437.8 million square feet of industrial office space is begging for tenants, Cushman & Wakefield's second-quarter office and industrial market report said. That's the highest ever.
Job loss the culprit
Unlike the commercial and industrial slump that hit metro Atlanta during the 1990-1991 recession, the current downturn isn't so much from overbuilding as from loss of jobs, brokers and managers say.
The Ga. 400 corridor seems to be the hardest hit submarket in the office sector. Its vacancy rate in the second quarter hit 29.3 percent, according to Cushman & Wakefield. On the industrial side, the I-75 South corridor led the metro area's void with a 22.7 percent vacancy rate.
"All quality tenants should be reviewing their real estate portfolios, because now is good time to take advantage of market conditions," said Holmes of CB Richard Ellis.
Some already have.
Heineken USA, the American unit of Dutch beer maker Heineken NV, will relocate its Southeast offices to Alpharetta from Buckhead on Nov. 1.
Dean Tearno, the company's vice president of corporate affairs, wouldn't discuss lease particulars, but he said the offer, which will almost double office space to 6,500 square feet from the present 3,400 square feet it occupies now, was too good to turn down.
"The overall package they put together was attractive," he said of the deal, which was brokered by Grubb & Ellis' Poulos. "It was attractive enough to convince us to go to a new location."
Some tenants say landlords are fighting hard to keep them from changing addresses. Others say landlords are looking for the slightest hint of increased demand to try to get the upper hand.
"There's a lot of space for rent," said Paul Beckham, a principal of public relations firm Hope Beckham, which has its headquarters in Corporate Square off I-85 and North Druid Hills Road.
The firm's lease for its 4,000 square feet of office space expires at the end of the year.
"I started sniffing around in late May and early June," he said, adding that he's looking to shave rent costs by a third to a half from the $15 per square foot the company now pays. "I saw some spaces that hadn't been looked at for 12 months."
That helps explain the $10 per-square-foot offer he said one Northside landlord proposed for a 6,000-square-foot space.
Even those paid to scout good deals for clients have been shopping for themselves, too.
Cushman & Wakefield's lease at One Atlantic Center on West Peachtree Street in Midtown -- its home of 15 years -- expired in March. Despite offers from competing properties, it opted to stay, signing a five-year lease.
"They gave us good money to redo our space; they were very aggressive on the rent," said Elting. "They were very aggressive and accommodating."
