A tenant-favoring office market is here to stay for a while.
Fourth quarter office reports indicate that local market conditions continue to benefit tenants as the scheduled opening of more than 1.1 million square feet of new space in greater downtown has kicked landlord competition into high gear.
Landlords at existing buildings are working harder to retain tenants, while landlords at new towers are pushing them to make the move.
So far, existing landlords are winning. The vast majority of tenants in the market end up renewing as relocations are being avoided, a trend CresaPartners noted in its fourth quarter report.
But leasing agents at under construction 1450 Brickell and Met 2 Financial Center are active behind the scenes trying to complete deals with multiple tenants, which could change the score in the old landlord vs. new landlord clash.
Matthew Goodman, principal of tenant advisory CresaPartners, says some big users, such as large financial service companies and law firms, are actively searching for a new home but haven’t committed. Cited tenants include JPMorgan Chase, Wells Fargo Advisors and law firm Hunton & Williams.
“There are large tenants looking in the market, locking terms and taking advantage of market conditions…,” Mr. Goodman said.
Foreign financial institutions that have bought local banks in recent years are driving much of the demand, he said. But because many are to leave existing locations, there’s going to be a lot of space to fill.
While those deals cook, many players and analysts are on the sidelines waiting to see who goes where and leaves how much space behind in order to assess the impact on the market.
“Once they [searching tenants] land somewhere it will produce a market change,” he says, “but we don’t know what that will look like.”
The fourth quarter saw mostly renewals because many firms hit by the sluggish economy opted to renew, taking an advantage of free rent and other incentives.
As market conditions continue to impede cash flow and jeopardize the ability to cover debt service, many companies have already cut expenses and payroll to the bone and are now trying to minimize all out-of-pocket expenditures, which tends to encourage renewals rather than relocations, tenant advisory firm Studley’s fourth quarter report explains.
Chris Lovell, senior managing director at Studley’s Miami office, said financial constraints, combined with parking limits and work disruptions, are deterring factors.
“Sometimes it’s a good thing for a business to move and sometimes it’s not,” he said. Other better-positioned tenants might be attracted by the efficiencies and amenities of a newly-built office tower, Mr. Lovell noted.
Studley’s report forecasts that landlords will heighten concessions later this year following completion of Met 2 and 1450 Brickell. If they want to remain competitive they will have to, the report says, since initial leases signed at the new properties are setting high standards in concession packages.
“The most attractive transactions will occur this year because there is enough space and competition,” Mr. Lovell said. “It creates a sort of feeding frenzy.”