Landlords At Tenants' Mercy In 2010
In commercial real estate, 2009 was a very uneasy year for tenants and property owners alike. Everyone seemed to be looking over their shoulder for more bad news.
The economy stalled, unemployment climbed into the double digits and banks stopped lending money. As a result, tenants and investors held back on long term real estate decisions. The I-495/Mass Pike commercial real estate market ended the year with a 27.5 percent vacancy rate and an average asking rent of just over $19 per square foot, both figures worse than the previous year. (Click here to view a chart on asking rents.)
In 2010, the recovery will be slow for most property owners, and for some, there may be no recovery at all.
Free Rent
The winners in all of this may be tenants. Asking rents are at the lowest they've been in the last 15 years. Concessions, such as free rent, moving allowances and "turnkey" tenant improvement packages are plentiful. For the foreseeable future, tenants will be able to upgrade to amenities-rich, well-maintained and located Class A buildings for half the cost of 10 years ago.
But along Interstate 495, amenities-rich, well-maintained Class A buildings in good locations are either new or they've been extensively renovated. The properties that face a much longer recovery time are those that cannot provide what's demanded in the marketplace.
In the 1980s along I-495, there were many buildings built to accommodate the rise of technology giants like Digital Equipment Corp. These days, those companies are considered obsolete, and for many real estate investors, their properties are obsolete, too.
As one seasoned MetroWest real estate investor said to us recently: "These buildings are the new mill buildings of our time." Their locations are challenging, their floor plates are too large, they don't subdivide particularly well, and they lack the look and feel that most tenants desire.
What will happen to these buildings? What is their highest and best use? Could they be converted to medical space, satellite schools, town offices or perhaps even storage? Or will they remain vacant until the return of economic prosperity along I-495?
These questions will only be answered as the region's economy recovers and these properties begin attracting attention again.
And while attractive leasing and ownership conditions have contributed to a recent increase in tenant activity, true recovery will take time. Technology and new corporate strategies such as hoteling, drop-in offices, and the mobile workforce are changing the dynamics of corporate space occupancy. Efficiency is the name of the game for corporate tenants, and real estate owners are at the mercy of companies operating very lean these days.
In the world of commercial real estate, the key variable is jobs, and until job growth ramps up, real estate investors will struggle to fill space.
Philip A. DeSimone is managing director at Jones Lang LaSalle. He can be reached at Philip.DeSimone@am.jll.com. Matthew Giffune is assistant vice president at Jones Lang LaSalle. He can be reached at Matthew.Giffune@am.jll.com.
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