Commercial Real Estate Leasing Market Update

CoStar is, for anyone not familiar with them, a service that tracks building occupancy in a very detailed way for office and industrial buildings.  They recently released their 2010 Year End Summary.  The verdict?  Occupancy is up, barely, and rates are either declining at a slow(er) rate or nudging up in some markets.

One interesting aspect is the disparity in rental rates from market to market.  For example, average industrial rates range from less than $3 in some markets to over $10 in others.  I'll talk more about that in my next post.

On a micro level, we've seen landlord asking rates and proposals all over the board even within a single market.  In Houston, for example, we received offers on Class A industrial distribution space with similar attributes (office, clear height, dock doors, access) range from about $4/SQFT to over $9/SQFT.  All of these properties were virtually commodity spaces, located within a 5 mile radius.

What this is demonstrating is the inefficiency of the real estate market.   The New York Stock Exchange, in contrast, is a very efficient market because buyers and sellers have instant access to all of the details of the most recent trades, company performance, and changing trends.  Real estate leasing transactions are not public information.  In spite of what brokerage firms might lead you to believe, the complete details of transactions including all concessions (free rent, improvement allowances, expansion or contraction rights, expense caps or abatements, tax and economic incentives, and more) are generally confidential and can vary greatly between transactions even within a particular property.

Add to that fact that each property has unique attributes, each property owner is in a different financial position, and each asset manager will value the particular use and financial strength of a prospective tenant differently.  All of this makes for a very inefficient market.

Further, each landlord has a different outlook of the current market trend.  In the present market, they want to believe that the demand is/will be improving and some owners have an extremely optimistic view.  Their attitude is, “Why lock in for a 5 or 10 year term at these low rates, when the market will be higher next year?”, so they are pricing current proposals at next year’s anticipated rates.

OK, so the real estate leasing market is inefficient.  So what?

Well, it presents a very significant opportunity for you to use that inefficiency to create a competitive advantage for your firm by either moving to a bottom priced equivalent property or educating your existing landlord to the reality of the market.

There is a very good chance that your firm's present strategy is simply this: Renew.  Renew everything, and stay status quo.  Unfortunately, the vast majority of other firms have the exact same strategy, a by-product of a tough economy. The bad news:  Your landlord knows your strategy.

So here is your new and improved strategy:  The Least Cost Alternative.  Even if it means moving, or at a minimum, taking a very serious look at market alternatives.   This requires that you go out and evaluate alternate space, meet with prospective new landlords, determine the “real” cost of relocation, and even share your findings with your landlord.  You'll either end up with an appreciative landlord and a lower rate, or a nice new space and a lower rate.

In either case, the operative term is “lower rate”.  Less is More.