COVER STORY, AUGUST 2008

OFFICE LEASING
Attracting and retaining tenants during a downturn.
Abraham J. Hidary

The Moinian Group’s plans to redevelop 1775 Broadway are expected to entice new tenants.

During an economic downturn, commercial landlords have one primary focus — to keep their buildings filled and their vacancy rates low. Of course, at such times it is extremely important that both the owners and their brokers take an active role in retaining and attracting tenants. But during tough times, this poses a significant challenge that is easier said than done.

One of the first things that landlords and brokers should do in this economy is evaluate their companies’ business plans and determine if their current strategies would suffice in a tougher economy. Take Hidrock Realty as an example: we invest in Class B and Class C buildings, and our niche is to renovate these buildings and fill them with small- and mid-sized tenants. 

While this specialization has worked well for us in the past, we had to determine whether it would remain effective during sluggish times. After careful evaluation, we found that in many markets this niche would likely excel even more during an economic downturn. Upgraded Class B and Class C buildings are an attractive alternative to pricier spaces. In fact, the cheaper asking rents are a viable solution in bad economies for businesses concerned about their spending. 

But while Hidrock was able to stick to its game plan, this may not make sense for other building owners. Some of them undoubtedly must make other changes in order to successfully ride out the slump. For instance, some landlords may attempt to approach tenants prior to their lease expiration and sign extensions at slight discounts, in order to obtain the financial stability necessary to survive the cycle. Many landlords have also been taking a step back and carefully evaluating the roles of their building manager and leasing agent, to make sure every dollar is being maximized on both the income and expense side.

Other options may include diversifying the firm’s service offerings, launching an aggressive marketing campaign, and/or offering incentives to new tenants and brokers.

It is a known fact that the economy is struggling. So with everyone now hungry for business, it is important to stand above the competition. A good reputation is key to attracting tenants and to building a relationship with the brokers, who can generate repeat business. One way to improve your reputation is by being responsive, such as answering offers within 48 hours, and providing fast turn-around time for lease signings.

In a strong market, delaying a response can ironically result in greater income for a landlord, since the rent that a landlord commands for a space can go up as time passes. But in a weak market, a delay depresses the value of the space. For instance, if a lease is agreed upon for $100,000 per annum, but the lease negotiation process is very arduous, it is feasible that the tenant will find alternative space for less money and ask for a reduction, or just walk away from the deal prior to lease signing. We try to avoid this at Hidrock by spending a considerable amount of time going through every paragraph of our form lease to anticipate the prospect’s comments/concerns. This way, we tailor the form to meet each tenant’s needs, which ensures a shorter turnaround. In fact, one of our new tenants saw a 2,730-square-foot space on a Monday, agreed to the terms on a Tuesday, and signed a 7-year lease by Friday.

Another way to win over prospective tenants (and their representatives) is to make their relocation as simple as possible. This can be done in several ways. For example, Hidrock recently hired a full-time architect to design build-outs for its tenants. He also works with prospective tenants to demonstrate how a certain space can be designed to meet their business needs.  Because the architect is an in-house member of our team, he is very familiar with the building design, layout and budget of each of Hidrock’s properties. 

The same goes for our construction team. The contractor and our architect collaborate on every project, so they have the experience to deliver build-outs in a timely and seamless fashion. This has been a huge selling point for Hidrock space, because prospective tenants see it as a convenient one-stop shop. Small- and mid-size companies want to focus on their core business to succeed in this environment, and they usually cannot put aside resources to focus on their space, design a look and monitor a build-out. In addition, they want to know their exposure to construction costs before they commit to a space. The more a landlord can handle on a tenant’s behalf, the more likely the tenant will make a commitment.

The tips above may seem a bit too obvious to make a huge impact, but they have worked extremely well for Hidrock. The newest addition to our portfolio, 53 West 36th Street, was purchased approximately 12 months ago, which was arguably when the recession began. Despite the timing, we have signed approximately 15 new leases in that time. This is especially surprising inasmuch as our lease-ups are at higher rents than nearby buildings (due to recent renovations). Despite the higher costs, five inherited tenants also have chosen to extend their leases.

There are also macro-economic factors attracting tenants to our building, of course, but adhering to many of the principles above has surely helped.

In grim times, it is important to spend time thinking outside of the box and building your company to provide the service and attention that is appropriate and necessary. It can make a huge difference in your success.

Abraham Hidary is the president of the New York City-based Hidrock Realty

BOSTON OFFICE LEASING ~ DIVERSITY HELPS MAINTAIN MODEST LEVEL OF LEASING Ripp After recording 852,000 square feet of positive absorption in the first quarter, the suburban Boston office market experienced 533,000 square feet of net negative absorption during the second quarter of 2008, mostly due to consolidations in the MetroWest and MetroSouth suburban submarket. Although statistically the first half trends positive, the negative numbers in this second quarter begin to reflect the greater economic challenges for the market. In fact, for the first time in nearly 3 years, rental rates have failed to rise, with the overall average asking yearly lease rate for the market holding steady at $21.94 per square foot. The market’s overall office vacancy rate for the second quarter of 2008 has remained the same as the first quarter at 15.1 percent and Class A vacancy rates are at 14.2 percent. The diversification of the New England economy, however, is helping to maintain a modest level of leasing. While the average asking rents have remained constant, true effective rents are beginning to slide. The effective rents factor in free rent, increased tenant improvements and other concessions. In this uncertain economic climate, landlords are increasingly accommodating tenants. Landlords are also beginning to market space earlier to pressure current tenants and increase the likelihood that leases will get signed. On the other hand, tenants are beginning to take a more cautious approach to real estate decisions and choosing the status-quo in a market where high moving costs, particularly the growing number of tenant improvement packages, are influencing renewals. Biotech companies and technology/software companies, representing 34 percent of the space needed, are most aggressively seeking space in the Boston suburban marketplace. The biomedical industry has supported several recent leases in the suburbs due to lab companies seeking cost alternatives outside the Cambridge market. Recent examples include AstraTech’s 84,000-square-foot lease at 590 Lincoln Street in Waltham and AMAG Pharmaceutical’s 56,000-square-foot lease at 100 Hayden Avenue in Lexington. For the remainder of 2008, the suburban Boston office leasing market should experience softening and deteriorating metrics. We expect the area to see a drag on rents and increases in vacancy with some sublease space coming to market in the next 6 to 12 months. In addition, due to rising gas prices, the demand for space with close proximity to bus, rail, and subway lines will continue to increase. However, the stalling of new construction in downtown Boston will prolong supply constraints in the future, returning that market to strong fundamentals and rent growth by the end of 2009. The suburban market will mirror these trends over a similar time frame. — Mike Ripp is an executive vice president and partner at CB Richard Ellis in Boston.

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