Whether or not the market and the economy are improving is up for debate. However, as tenants lease new space, grow, or shrink, I see one common theme. No one wants to come out of pocket to cover construction costs.
In 2009, as we were in the early stages of a deep recession, companies were capital constrained and used that as leverage with landlords who were all too happy to reach for tenants. Now five years later, tenants are still pushing for turnkey deals and many landlords are willing to spend the money to land the tenants in exchange for higher face rents.
In addition, space that is already built and includes furniture seems to be leasing not only quickly, but in some cases, at a premium. Landlords typically don’t include a furniture allowance in a turnkey deal, but a furnished space can provide significant savings to the tenant. I have recently done two deals where a tenant leased furnished space on an as-is basis, and I am marketing a small furnished unit currently that has three pending proposals. The deal will likely be done at, or above the asking rent in the building!
Sublease space in New Jersey has declined by almost 850,000 since Q1 2012. Some of those leases burned off and the space is now available on a direct basis, but it’s still a large amount of space.
Finally, we recently advised one of our landlord clients to build a small piece of space, roughly 2,500 sf, on a pre-built basis. Getting him to agree to do so wasn’t easy as the cost was significant. However, I argued that we would have a much greater chance of leasing the space quickly and would minimize the free rent given to the tenant if we re-built the space to the new building standards.
The space leased as soon as he approved the plan, leading to three other spaces in the building being contemplated as pre-builts. All of those units have activity and are likely to lease shortly. Again, tenants do not want to come out of pocket for construction and smaller tenants don’t want to get involved with a build out process.
Spaces that have existing conditions or even have plans in place are also quicker to occupy. As the corporate approval process continues to become more cumbersome, timing is becoming a greater issue. Permits and construction take time, ordering furniture takes time…it’s a process. Eliminating that process helps tenants get in to their new space faster and in many cases, cheaper.
So as Nirvana said, “Come as you are…take your time, hurry up, the choice is yours, don’t be late.”