It’s true. Those increasing allowances for tenant improvements that you’re seeing and brokerages are reporting about are real.
This spring, Cushman & Wakefield released information about New York’s commercial real estate market, including one fact I’ve seen reflected in interactions with our firm’s clients and heard in whispers from brokers to architects: tenant improvement allowances are on the rise. In fact, the firm noted that 17 leases signed in 2017 had $100-plus per square foot in tenant improvements detailed in their work letters, putting these concessions on pace to surpass 2016’s total of 41 leases with such provisions.
RXR Realty Chief Executive Officer Scott Rechler said in Bloomberg the rise in allowances for tenant improvements is based on the market’s state of equilibrium, where strong leasing juxtaposes the new supply’s presiding cap on how much landlords can raise rents. In this state, Rechler said, landlords’ pricing power is reduced while tenant demand is increased for the kinds of concessions needed to bring spaces up to current standards.
These $100-plus concessions are nothing to brush off.
Smart tenants are on to this. It’s not unusual for would-be tenants to ask building owners where their $100-and-north allotment is for improvements, since they know other owners are being flexible. Landlords, it seems, have the wiggle room to meet the demand, sometimes with packaging deals that ensure the arrangement works on both sides. They are also investing more into making their office spaces ultra-marketable, including creating attractive prebuilt options, amping up building and office amenities and modernizing public spaces to attract tenants.
So, what does that mean for tenants deciding on their next move? Should they make a shift earlier, while concessions are still high, or look at alternatives?
Examine any cost savings. Tenants need to do the math to see if it’s financially smart to break an existing lease, move early or leave. For instance, if a lease is coming to term in three years, mulling options a year and a half before the end of term may allow a tenant to make the most of current concessions. Also, if a tenant is locked in at a higher rent, weighing the costs savings associated with ending a lease early and signing a new one is pertinent. Perhaps, for instance, a tenant would decide to vacate early and sublet his existing space or work out an arrangement with the landlord on one of his lateral properties. Exploring options with an open mind can lead to unexpected savings to use in the design of that perfect office space.
Weigh fresh options. Comparing neighborhoods can help a prospective tenant determine if moving provides an advantage to his business or organization. Will going from Midtown South to Downtown, for instance, offer a better position? Is a brand-new gorgeous building right for the business’ needs or would a vintage space afford cost savings and allow a budget for customization? It’s important to look at the level of modernization, views and location.
Check out marketing suites. Investigating these corporate spaces, which are the commercial equivalent of model apartments, permits tenants to visualize how a new or forthcoming office would look and feel, allowing them to open and close pantry doors or sit in furniture and see the scale of the space. Often, these office suites feature a cozier, home-like environment with high-end fixtures and a sophisticated décor, helping landlords get leases signed and tenants feel more secure in their decisions. Examples include RFR’s 285 Madison Avenue or 920 Broadway, the latter of which uses a prebuilt space as a marketing center for the building. Tenants can even lease the marketing center and get a beautiful, ready-to-occupy space.
Compare against prebuilts. Prebuilt offices may be a smart option, depending on a tenant’s style and budget. By taking a closer look at what’s on the market now, prospective tenants can make an educated decision.