SAN DIEGO-Teaching local tenants how to get the most bang for their buck and capitalize on a down market was the goal of the recent FrameWorks Workshop here titled “Leasing Fundamentals: How to Save Money, Reduce Risk, and Manage the Leasing Process.” The workshop also discussed the current state of the economy as it relates to the real estate market in San Diego County. Attendees included CFOs, VPs of finance, CEOs, COOs, company presidents, real estate and facility department executives, and those responsible for a tenant’s lease strategy, negotiation and implementation.
Presenters included Doug Cowan, EVP of project and development services for Jones Lang LaSalle; Scot Ginsburg, managing director of tenant representation at JLL; Joe Perez, CPA and partner in the San Diego office of Squar Milner; and Dawn Saunders, of counsel in the San Diego office of Mintz Levin.
“The main focus was an update on the real estate market for commercial office, commercial lab and biotech space: where we are, where we’re headed, the types of concessions (both economic and non-economic), specific termination and expansion rights—the types of things in the lease document that we’re able to achieve now that we couldn’t at the height of the market,” Ginsburg commented to GlobeSt.com following the workshop.
The workshop tackled where the best deals are occurring in San Diego and where landlords are gaining ground. Ginsburg says that areas countywide where markets have firmed up for class-A space have been Del Mar, Rancho Bernardo and Sorrento Mesa, and that Mission Valley, UTC and Carlsbad are beginning to firm up. “Downtown is still kind of a troubled child, although rents are still pretty soft down there. The reason for that is when a market gets depressed, all the class-B office tenants that were paying well above market upgraded to class-A space for prices that they were paying for class B, if not cheaper. All that weren’t getting leased are starting to, which left a big hold in the B market. It’ll be a couple of years before that firms up.”
As GlobeSt.com previously reported, while recovery is on the horizon for San Diego’s office market, the first quarter gave the year an uninspiring start. After two years of healthy growth, with record-breaking leasing activity in 2010 and net absorption of 860,000 square feet in 2011, the office market hit a flat spot in the first quarter of 2012, according to a report released by Jones Lang LaSalle.
However, the market is showing signs of recovery with declining vacancy rates, an increase in active requirements and improved transaction fundamentals (longer terms, higher rents and fewer lease concessions) vs. what was seen in 2009/2010, executives from Cushman & Wakefield told GlobeSt.com in early April.
Common leasing mistakes were also explored in the workshop. Ginsburg says a typical mistake tenants make is not giving themselves enough time to negotiate their lease before the term expires. “A year and a half to two years is necessary. If you want to renew, it’s much more difficult to negotiate a discount over fair market renewal if you wait. Depending on the size of the space, a one- to two-year lead time is appropriate to start the process.”
The other common mistake tenants make is not knowing their budget, particularly when it comes to tenant improvement costs. “Have your own independent team evaluating what the costs are for improvements to see if the construction costs match the landlord allowance,” Ginsburg advises. “You do not want to find out you’re short for your construction costs.”
The workshop also advised tenants to be sure to negotiate for HVAC charges so that they’re not paying high after-hours usage, if this applies to them. “Make sure you negotiate a fixed-rate after-hours charge for your entire premises—not just a zone. Also fix the parking charges; don’t let the landlord have the ability to change your parking fees during the lease term.”
Ginsburg also recommends tenants consult with a broker before signing or renewing a lease to help them get a better deal and leverage the market. “Share in the landlord’s renewal profits—go for a bigger spread than what the landlord is offering. It’s usually three to four times more costly for a landlord to lose a tenant than it is for a tenant to move.”
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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.
