It’s an Office Tenants’ Market : Landlords Become Eager to Please as Vacancy Rates Rise
After years of suffering double-digit rental increases and jumping to the landlord’s tune, law firms, big corporations and other major business tenants have found that the tables have turned as a result of a nationwide glut of office space.
“I think it’s only appropriate” that tenants now have the upper hand, said John Peace, Western regional manager of real estate for AT&T;, which saved several hundred thousand dollars last month when it signed a multimillion-dollar deal to lease 183,000 square feet of office space in the 611 West 6th St. building, owned by Mitsui Fudosan Inc. “During tight markets, landlords have a tough attitude about tenants.”
The tough new attitude of tenants is an outgrowth of a massive nationwide glut of office space that has sent vacancy rates soaring all over the country.
Nearly as much office space was built during the 1980s in the United States as was built in the previous 50 years, according to real estate experts. The gleaming new crop of high-rises has produced a nationwide average vacancy rate of 20%--four times higher than in 1980, according to Office Network, a Houston-based consulting firm.
The glut has sent rents plummeting in many markets and increased demand for managers who can keep tenants happy and raise building occupancy.
Turner Broadcasting System Inc. will cut its leasing costs 25% as a result of signing a 10-year, $14.9-million lease earlier this month for office space in Century City, said William Bryan, Turner’s vice president of real estate.
Although Bryan would not disclose the per-square-foot cost of 43,924 square feet of space that Turner will lease from JMB/1888 Partners, a spokesman for JMB said that annual leasing rates in the area range from $24 to $48 a square foot but that effective rates are often lower because landlords must offer incentives such as relocation subsidies.
“We were able to gain a very strong deal,” Bryan agreed.
Other firms exact even more concessions from landlords.
H. Carl Muhlstein, executive vice president of the Los Angeles brokerage Wilrock National of California, said he knows of instances in which tenants have asked for and received equity in the buildings they lease. He said others have received huge cash bonuses to refurbish their office space and special amenities such as dedicated elevator service and free parking.
Indeed, tenants have become so influential that employees of small companies get treatment once reserved for the biggest companies or guests of fancy hotels.
Tenants in a building at 800 Wilshire Blvd. have a special intercom system that allows them to contact parking lot attendants to retrieve their automobiles. That way the cars are waiting for them when they leave the building.
Concierges--which can cost landlords $35,000 or more a year--have become popular amenities at many office buildings, including First Interstate World Center downtown and Fox Plaza in Century City.
Developer Lowe Enterprises Inc. is building a day-care center and gym facilities for tenants of its new Brea Place building off State College Boulevard in Orange County. Tenants at the Wilshire Palisades building in Santa Monica even got developer Tooley & Co. to retrofit the building with showers and a locker room to accommodate executives who jog.
“In this soft market, the tenant is king,” said Perry S. Herst Jr., chairman of Tishman West Cos., which last developed a commercial office building in 1989 and now concentrates on building management. He said Tishman, which manages 11 million square feet of office space, including the giant Arco Plaza for Shuwa Investments Corp., makes sure tenants are happy. On occasion the company has even arranged parties and lunches for tenants, he said.
Such treatment is a far cry from the early 1980s, when the vacancy rate in downtown Los Angeles stood at less than 2% and many building owners were raising rents at double-digit rates.
Those salad days started disappearing in the mid-1980s when banks and thrifts altered their lending practices after longtime corporate borrowers began turning to the stock and bond markets for cash. The financial institutions tried to make up for the lost business by aggressively lending to real estate developers.
Although some new buildings in Los Angeles ask as much as $50 a square foot for office space, the average effective rate for office space in Southern California is 15% less than a decade ago because landlords must offer heavy relocation subsidies or “free rent” to attract tenants, said Jon Torgeson, a senior vice president at CB Commercial, a Los Angeles-based commercial property brokerage.
Such promotions have set off restlessness among tenants. Torgeson said tenants have begun moving from the cramped and inefficient quarters of older “B” buildings to the spacious, modern accommodations of “A” buildings in a migration that resembles “musical chairs.”
What’s more, as developers and other players have jumped into the management field, profits have tumbled. Property management fees, for example, have slipped from about 5% of gross building income to under 3%, experts say.
Nevertheless, executive headhunter Lee Van Leeuwen, who heads Korn Ferry International’s national real estate practice, said, “Property management is the place you want to be today in real estate because it’s the most stable part of the business.” By contrast, he said, it is nearly impossible to make money in real estate development.
Tenants and other real estate experts say the entry of developers into building management has improved building management.
“I think on the whole building management is becoming more responsive as more development companies have gone into the business,” said AT&T;’s Peace. “With more people begging for your business, you get a more competitive market as far as services and price goes.”
“Those of us who have developed financial relationships and expertise outside of our traditional areas (of construction) are going to be better development firms,” Lowe said. “And by diversifying, we can better survive economic downturns because we will not be solely dependent on fees” from real estate development.
But the good old days may be a long time coming for developers.
“Most of us are managing buildings just to stay (financially) afloat until we can develop again,” said Tishman’s Herst. “But that opportunity may not come for another three to five years.”
For Rent Office vacancy rates in the Southland for the first quarter of 1991. Downtown Los Angeles: 21% Mid-Wilshire: 19% Glendale: 15.4% Pasadena: 10.2% Pomona (San Gabriel Valley): 23.3% Costa Mesa: 24.3%* *Central Business District, including Newport Beach, Irvine, Costa Mesa and Hutton Center. Source: Custman & Wakefield of California
A Glut of Space National Office vacancy rates ‘80: 5% ‘81: 5.1% ‘82: 13% ‘83: 15.2% ‘84: 16.4% ‘85: 16.9% ‘86: 18.6% ‘87: 19% ‘88: 18.6% ‘89: 19.5% ‘90: 20% Source: The Office Network
