WASHINGTON, DC–Following the Great Recession the entire US, for the most part, became a tenant's market. Landlords eagerly granted generous TIs and free rent to keep existing tenants and lure the occasional new one.
Markets around the US have long started improving but tenants don't seem to have gotten the message. “Even though the markets have rebounded nationally concessions are still increasing for class A space,” says Sandy Paul, Newmark Grubb Knight Frank's managing director of National Market Research and co-author of a report on the subject that the company is about to release.
There are several reasons for the still-robust concessions tenants are receiving, starting with the uncomfortable fact that this time around there is simply less net new demand for space than in prior cycle. But Paul cites another reason, which should dismay office landlords that had been hoping for a return to a more balanced market: tenants have gotten used to these concessions and simply assume they will be part of the package.
“For the remainder of this cycle those assumptions are baked in,” Paul tells GlobeSt.com. “When tenants feel they have leverage they are going to push it as hard as possible so it will make sense that they will enter the next cycle with a similar set of expectations.” Whether those expectations are met or not, though, will be due to usual push-pull of supply and demand market forces.
The report notes that while US office market fundamentals have strengthened steadily over the past five years with vacancy declining 320 basis points and asking rents rising approximately 17%, average concessions for Class A space in major US cities have also risen significantly during this time period. Specifically, since 2008 average tenant improvement allowances per square foot and average months of free rent per year of term have risen 66% and 73%, respectively.
Meanwhile, average starting rents have also risen, albeit at a much slower rate of 21% over the same time period, the report says.
This, of course, is not a blanket finding. Concessions are rising on average, but not for every building in every market. “There are many submarkets among the major metro areas that are outperforming in terms of demand and which offer much less than the national average in concessions,” NGKF says.
Bad News for Houston
The report looks at several cities where concessions are heavily used.
The good news is, for landlords at least, NGKF predicts a slow shift to a more balanced market albeit one that still favors tenants in almost every market that it defines as 'strongly tenant-favored', starting next year. The bad news is, again from the landlords' perspective, at least one city — Houston — will remain in the 'strongly tenant-favored market' category.
It is a case of simple math, NGKF writes.
Concession usage has become more prevalent in response to rising office vacancy rates and an increasing number of big blocks of available space. In the Class A segment alone, the City of Houston has 75 blocks of available space in excess of 100,000 rentable square feet and 25 blocks of available space in excess of 200,000 rentable square feet as of the end of third-quarter 2016.
Some Relief for Washington DC
Washington DC is one 'strongly tenant-favored market' that is predicted to shift to a 'moderately-favored tenant market' in 2017.
While NGKF didn't rank the cities in terms of which offers the highest concessions, Washington DC has been known for this distinction for a few years now. Probably, it still does have the highest concessions, Bethany Schneider, research manager and report co-author tells GlobeSt.com.
“It has become fairly typical for larger deals of 50,000 square feet or greater with lease terms of ten years or more to receive $100 per square foot in TIs and one month of free rent per each year of the term,” she says. So a tenant signing a 12-year lease would receive 12 months of free rent.
“I have seen comps where the TI is $120 or higher but there are almost always specific circumstances to the deal — that has not become a norm in negotiations,” she adds.
Demand for space in the area is starting to perk after years of limited growth, Schneider says, so the pendulum should slowly inch its way towards the landlord next year. Already, partial-year data for 2016 suggests average TI allowances have declined slightly while months of free rent per year of term have plateaued, the report says.
There is some speculation that concessions have peaked in Washington DC, but NGKF is definitely hedging its bets. Whether it is a market that strongly-favors tenants or moderately favors tenants, when all and said and done DC will remain a tenants' market for at least the next two years.
WASHINGTON, DC–Following the Great Recession the entire US, for the most part, became a tenant's market. Landlords eagerly granted generous TIs and free rent to keep existing tenants and lure the occasional new one.
Markets around the US have long started improving but tenants don't seem to have gotten the message. “Even though the markets have rebounded nationally concessions are still increasing for class A space,” says Sandy Paul, Newmark Grubb Knight Frank's managing director of National Market Research and co-author of a report on the subject that the company is about to release.
There are several reasons for the still-robust concessions tenants are receiving, starting with the uncomfortable fact that this time around there is simply less net new demand for space than in prior cycle. But Paul cites another reason, which should dismay office landlords that had been hoping for a return to a more balanced market: tenants have gotten used to these concessions and simply assume they will be part of the package.
“For the remainder of this cycle those assumptions are baked in,” Paul tells GlobeSt.com. “When tenants feel they have leverage they are going to push it as hard as possible so it will make sense that they will enter the next cycle with a similar set of expectations.” Whether those expectations are met or not, though, will be due to usual push-pull of supply and demand market forces.
The report notes that while US office market fundamentals have strengthened steadily over the past five years with vacancy declining 320 basis points and asking rents rising approximately 17%, average concessions for Class A space in major US cities have also risen significantly during this time period. Specifically, since 2008 average tenant improvement allowances per square foot and average months of free rent per year of term have risen 66% and 73%, respectively.
Meanwhile, average starting rents have also risen, albeit at a much slower rate of 21% over the same time period, the report says.
This, of course, is not a blanket finding. Concessions are rising on average, but not for every building in every market. “There are many submarkets among the major metro areas that are outperforming in terms of demand and which offer much less than the national average in concessions,” NGKF says.
Bad News for Houston
The report looks at several cities where concessions are heavily used.
The good news is, for landlords at least, NGKF predicts a slow shift to a more balanced market albeit one that still favors tenants in almost every market that it defines as 'strongly tenant-favored', starting next year. The bad news is, again from the landlords' perspective, at least one city — Houston — will remain in the 'strongly tenant-favored market' category.
It is a case of simple math, NGKF writes.
Concession usage has become more prevalent in response to rising office vacancy rates and an increasing number of big blocks of available space. In the Class A segment alone, the City of Houston has 75 blocks of available space in excess of 100,000 rentable square feet and 25 blocks of available space in excess of 200,000 rentable square feet as of the end of third-quarter 2016.
Some Relief for Washington DC
Washington DC is one 'strongly tenant-favored market' that is predicted to shift to a 'moderately-favored tenant market' in 2017.
While NGKF didn't rank the cities in terms of which offers the highest concessions, Washington DC has been known for this distinction for a few years now. Probably, it still does have the highest concessions, Bethany Schneider, research manager and report co-author tells GlobeSt.com.
“It has become fairly typical for larger deals of 50,000 square feet or greater with lease terms of ten years or more to receive $100 per square foot in TIs and one month of free rent per each year of the term,” she says. So a tenant signing a 12-year lease would receive 12 months of free rent.
“I have seen comps where the TI is $120 or higher but there are almost always specific circumstances to the deal — that has not become a norm in negotiations,” she adds.
Demand for space in the area is starting to perk after years of limited growth, Schneider says, so the pendulum should slowly inch its way towards the landlord next year. Already, partial-year data for 2016 suggests average TI allowances have declined slightly while months of free rent per year of term have plateaued, the report says.
There is some speculation that concessions have peaked in Washington DC, but NGKF is definitely hedging its bets. Whether it is a market that strongly-favors tenants or moderately favors tenants, when all and said and done DC will remain a tenants' market for at least the next two years.
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