Don’t Hit Up SL Green for Incentives
Guelda Voien April 20, 2017, 4:38 p.m.
With negative absorption rates and a cooling investment sales market for Manhattan office buildings, landlords sometimes get creative. They throw lots of buildout money at tenants and offer “concessions” that sometimes take the form of just… free rent. But tenants hoping for sweet incentive packages, be warned: SL Green Realty Corp. does not play this game.
So said the publicly traded real estate investment trust’s chief executive officer, Marc Holliday, on his firm’s first-quarter earnings call today.
The practice of “buying up rents with TI [or tenant improvement] packages [is] at the level where it indicates a trend,” Holliday said. This results in “scrutiny and notoriety” for the deal and the landlord. So SL Green won’t be throwing in an all-marble lobby just to get you to sign on the dotted line. “Our philosophy is to … hold the line on tenant concessions,” the CEO said.
“It’s sort of a new phenomenon,” Holliday said, of plying tenants with cash and buildout incentives in the office space. Landlords are trying to keep rents high on paper “because they’re planning to exit out in the near future,” he said. With interest rates expected to rise, finally, this only compounds the incentive to, well, incentivize. And lenders don’t mind higher listed rents, either.
To be sure, tenants have long received incentives from landlords, especially in down markets. Holliday seemed to suggest the difference now is that owners aren’t simply trying to get a deal done in a tepid atmosphere, but are rather trying to keep reported rents at levels that may be inflated.
SL Green does offer some upfront help to tenants.
“Average TI for renewal deals [SL Green completed] was $20 per square foot” in the first quarter of 2017, Holliday said, and that number was $63 per square foot for new leases. He added that those averages are “well below what we achieved throughout 2016.” Holliday did not say whether or not incentives took the form of cash contributions to buildout or lower rent.
Holliday also underscored that he’s values-neutral on the practice of heavily incentivizing—it just doesn’t work for SL Green.
“Are tenants swayed by incentives?” the CEO asked. “Everyone manages their business from a different point of view. Some tenants look at net effective [rent], some … want to lower their occupancy costs. Others will say they want to preserve their capital and ‘I’m willing to pay a higher rent,’ ” to do so.
But SL Green is in a better place than many landlords, which may make it easier to “hold the line.”
Holliday said his firm did over 50 lease transactions that are 50,000 square feet and under in the first quarter, because that’s all that’s become available. “We’re really just filling in pockets of space,” he said.