Commercial Real Estate and Office Complexes and Project Funding and Real Estate & Retail

Most office-space renters opt to stay where they are

April 6, 2009

Conventional wisdom would suggest the recession presents a classic opportunity for solid businesses in need of office space to upgrade their surroundings on the cheap.

The smart play, the thinking goes, would be for a CEO to jump on a sweet location, lock in a rock-bottom multi-year lease, and enjoy the fruits of his cleverness from a swanky new corner office. Except that this time around, local commercial real estate hands say, that's not what's happening. Or happening as much.

Businesses are simply too scared of the future—and too tight with their cash—to make expensive moves. Rather than switch storm cellars in the middle of a tornado warning, many are, in the most literal sense, sitting tight. That puts landlords with few vacancies at an advantage, a switch from the go-go period of a few years ago when tenants took advantage of healthy corporate moving allowances to jump into brand-new space.

"What I've typically observed and heard about is that you can now get Class A space that you couldn't [previously] afford," said Jeffrey Fisher, director of Indiana University's Benecki Center for Real Estate Studies. "So a tenant that was a Class B tenant is now able to afford Class A space at Class B rates."

Moving up to a better building during a time of depressed rents "would seem to make sense, wouldn't it?" said Jeff Harris, president of Meridian Real Estate. "But what makes sense and what we're seeing aren't necessarily one and the same. Everybody wants flexibility because they don't know what the future holds."

Premium Class A still rents for north of $20 a foot, while non-premium Class A goes for $17 to $19, said David Moore, a principal and senior vice president of office services in the local office of Colliers Turley Martin Tucker. Class B runs $14 to $17. M&I Plaza, also downtown, is an example.

Moore said he hasn't seen a migration of well-off companies to nicer (and discounted) addresses. Nor does he see a flight by poorly performing firms to cheaper Class B buildings. The over arching Zeitgeist, he believes, is to hunker down.

Technology and other factors have increased costs for typical relocations to between $4 and $6 a square foot.

"I think people are absolutely watching every penny," Moore said.

Not that companies aren't taking as much advantage of the market as they can. When a lease comes up, the typical business plays hardball on the renewal terms and, perhaps, slices the square footage it occupies. Likewise, companies that aren't up for renewal are exploring the option of shrinking their footprints and subletting the leftover space.

"I can tell you for a fact that that thought process is occurring," Moore said. "Because I sit in those meetings every week."

One of his company's clients, a software and consulting firm called Theoris Group, had to decide where to go when its lease for 9,600 feet on the 15th floor of the 8888 Keystone Crossing building approached its April 2009 expiration. Management started shopping in earnest last summer, but the fall's bad economic news convinced executives to sign a three-year extension at their present location.

"The world changed, and so did our point of view," said Theoris CFO George Huntley.

To no surprise, there's a surfeit of available space these days, with the downtown market remaining the tightest—primarily because relatively few new Class A buildings have come online there recently.

Vacancy rates for A space are slightly higher than B space. The latest figure for the whole market sits near 18 percent, according to statistics provided by Michael Corr, a senior vice president in the local office of Jones Lang LaSalle. Downtown vacancy is in the range of 15 percent, while the northeast submarket clocks in at more than 30-percent vacant.

Despite tough times, all is not bad news for landlords.

Moore said one of his major properties, Castleton Park, leased more square footage, 40,000, in the past two months than in all of last year.

"It's a very weird time right now. For a lot of reasons that are very obvious," Moore said. "But there are landlords out there that are leasing space."

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