IRVINE, CA—Due to maxing out on current space and staff, many companies will need to expand their office footprint in order to accommodate growth this year, PM Realty Group's EVP and managing director Jim Proehl tells GlobeSt.com. We spoke exclusively with Proehl about trends in office leasing and space needs in 2016.
GlobeSt.com: Which barriers to office leasing do you see easing up in 2016?
Proehl: Tenants will have fewer choices, so decisions by tenants will be quicker with less concessions. As a result, landlords will be able to negotiate much more favorable deals. Most tenants have maxed out on their current space, so all the excess phantom space that had to first be utilized by tenants is now gone, meaning many more tenants will need additional space as they continue to grow. Also, most tenants have maxed out their current staff, so they are now in a position where they have to hire additional staff to handle the additional workload, which means additional space will now be needed by more tenants.
GlobeSt.com: Which barriers do you see worsening?
Proehl: The cost to build out tenant improvements will continue to escalate, which makes lease deals more expensive and requires higher rental rates and longer terms. Parking barriers will worsen as tenants go to more open space plans where the per-square-foot per employee continues to decrease.
GlobeSt.com: Are tenants continuing to shift their space needs down, or do you expect this trend to reverse itself at all in 2016?
Proehl: Most tenants do not want to take a step down since their largest operating cost is the cost of their staff. Tenants will try to get more creative with more open space to reduce their square feet while still maintaining the same quality of office space in the same quality location. There will be some tenants in low-margin businesses that will need to move down a class of building or relocation to a cheaper submarket to stay in the same quality of building. For tenants who signed their leases five years ago, they can expect a 50% increase in their rent, which is very significant.
GlobeSt.com: How optimistic are landlords about the office sector for this year?
Proehl: Landlords have not been this optimistic since 2006-07. Vacancy should drop below 10% in 2016, and rental rates will achieve double-digit increases. Landlords now have multiple tenants vying for good suites. Due to Title 24 raising the cost to build out suites, tenants are now signing five-to-seven-year leases with 3% to 3.5% annual bumps. 2016 will be a banner year for office landlords.
Want to continue reading?
Become a Free ALM Digital Reader.
Once you are an ALM Digital Member, you’ll receive:
- Breaking commercial real estate news and analysis, on-site and via our newsletters and custom alerts
- Educational webcasts, white papers, and ebooks from industry thought leaders
- Critical coverage of the property casualty insurance and financial advisory markets on our other ALM sites, PropertyCasualty360 and ThinkAdvisor
Already have an account? Sign In Now
*May exclude premium content© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
Carrie Rossenfeld
Carrie Rossenfeld is a reporter for the San Diego and Orange County markets on GlobeSt.com and a contributor to Real Estate Forum. She was a trade-magazine and newsletter editor in New York City before moving to Southern California to become a freelance writer and editor for magazines, books and websites. Rossenfeld has written extensively on topics including commercial real estate, running a medical practice, intellectual-property licensing and giftware. She has edited books about profiting from real estate and has ghostwritten a book about starting a home-based business.
