Advantage Shifts to Tenants in the Atlanta Office Market
By Bill Leonard, President, Wm. Leonard & Co.
The disruption and uncertainty in our economy are taking their toll on the Atlanta office market. We are beginning to see exciting opportunities for companies positioned to move forward with a decision on their real estate requirements. Vacancy rates are up, rental rates are on the decline, and sublease space is hitting the market in large chunks. Landlords are showing much more flexibility, and concessions are increasing at a steady pace. While institutional landlords are normally not interested in leases less than five years, many are open to shorter term solutions today, allowing both the landlord and the tenant to measure the future of the economy and delay long term decisions.
Traditionally, landlords are slow to respond to economic downturns, especially if their rent roll is secure for the short term. However, we expect them to become increasingly aggressive as the year unfolds. Where there is disruption there is always opportunity. Below are a few recommendations on how to take advantage of this market:
- Enter the market early. The best plan is to begin to evaluate your options in the market as early as possible. Even if you have two or three years remaining on your lease there may be opportunities out there. You never know when the right situation will present itself. If you are actively looking and have time, you can measure the market and act when it is most advantageous for you. Even if you don’t find the right opportunity, you will know that you have evaluated your options and made an informed decision.
- Protect yourself for the long term. The best opportunities always come to those who are willing to go against the grain. As J. Paul Getty said, “Buy when everybody is selling, and sell when they are buying.” Now is the right time to tie down a great long-term lease. Every real estate cycle has its peaks and valleys. The next 18 months should be the best opportunity in a long time to negotiate a long term lease fixing your rent at reduced rates with flexibility to grow in the future. Term and strong credit are the most desirous factors for landlords.
- Renegotiate your existing lease. Landlords are going to extraordinary measures to retain their existing tenants. They are realizing that it is far too expensive to replace a tenant, especially in this market, so many of them are open to renegotiating existing leases even if there are two years or more remaining on the lease. They want to avoid the vacancy period between tenants and the high tenant improvement costs required to retrofit the space, so they are often willing to refurbish the space and/or renegotiate the rental rate in order to extend the lease. As a tenant you must be willing to give some value to the landlord. They want additional term, and credit is king, more now than ever before. That is if anyone can define good credit in today’s market.
- Carefully evaluate your landlord. In 33 years of business we have seen many difficult times in the real estate market. We began in the mid-seventies providing consulting services to banks related to their problem real estate. In all of the real estate cycles, I have never experienced anything like this before. In past downturns, most lenders were strong, so there was rarely reason to worry about lenders performing. Even if a property was foreclosed, the lender had the resources to honor the owner’s commitment. That is not necessarily the case today. Many financial institutions have been unable to fulfill commitments to customers. This makes the selection of your new landlord very important. Tenants are beginning to ask landlords for their balance sheets and commitments from their partner or lender to insure they have the funds available to complete the tenant improvements agreed to under the lease. If the tenant’s credit is strong enough and it is taking enough space it may even require the landlord to post a letter of credit or escrow the funds to insure their performance. Non-disturbance agreements are now a requirement not just a nice-to-have.
- Short term renewals. As mentioned above, landlords normally will not consider lease terms less than three to five years. However, because many companies are unwilling to make long term commitments today, landlords are being forced to reconsider. Why not extend the lease for one to two years and keep the cash flowing while we wait to see what direction the economy will take in the future? The main concession for the tenant will be the shorter term, but the landlord will typically command their quoted rental rate in exchange for flexibility. Both parties can get through this period of uncertainty and make a longer term commitment later.
- Retain Representation. The first step in the process, especially in a transitional market like we are facing today, is to select a professional as your advocate in the lease negotiation process. If you are running a business or have the financial responsibilities of the company, you don’t have time to investigate the market to know where the best opportunities are. Retain a local real estate broker who specializes in tenant representation and advisory services. They should be able to demonstrate their knowledge of the market and you must believe you can trust them to put your interest first as they advise you through the process. They become your trusted advisor and are paid by the landlord of the building you select so there is no cost in the transaction to you. Further, he or she should be able not only to save you money but to negotiate other aspects of the lease to protect your interests in the transaction.
Established in 1975, Wm. Leonard & Co. delivers customized real estate solutions and comprehensive tenant advisory services primarily to high-growth companies. It represents tenants exclusively as a trusted advocate throughout the leasing process and the term of the lease. Wm. Leonard & Co. has earned a reputation for providing results for its clients through years of market knowledge and creative negotiating strategies. For more information please contact Bill Leonard or Doug Legg at 404-252-9700 or visit www.wmleonard.com.