While the office market is decidedly in the tenant’s favor, it’s not without its challenges and pitfalls. The biggest challenge for tenants is twofold: first, the cost of building out space (tenant improvements, or TI) and second, the availability of capital to pay for that cost.
Buildout Costs
TI costs continue to escalate, and budgets of $100 per square foot and more are becoming commonplace. Landlords who have vacant space that is modern and well laid out have a distinct advantage over those who are stuck with raw space, requiring a full buildout.
Solving the Problem of Funding Tenant Improvements
Many landlords have their hands tied by their lenders, who are sometimes refusing to advance funds for TI. At times, tenants are learning this at the 11th hour in the process of getting new space, after being assured by the prospective landlord that terms were agreed to. Other landlords have access to capital but have made a strategic decision to not expend capital on TI.
The solution to this problem is evolving and may include limiting the scope of work more than a tenant initially desired, signing a longer term lease, and having the tenant contribute part of the TI cost. This last component is new to most tenants and is a capital outlay they didn’t expect or budget for.
As a result of all this many tenants are now favoring either subleases with good existing conditions (and often with furniture as well) or so-called “spec suites”, where a landlord has built out a space, complete with new finishes (and often times with furniture) in the hopes of attracting a tenant. Both solutions eliminate the need for a costly buildout, not to mention saving the tenant the time and aggravation associated with construction.
Rental Rates
For the most part, landlords are keeping their asking net rental rates at pre-pandemic levels. In recognition of the softness of the market, they will make deals more attractive by offering increased free rent periods, and more generous TI allowances. One area where rates are starting to come down is when an investor buys a property at a steep discount from a lender who has foreclosed. Armed with a low basis, the investor will many times lower the asking rental rate to capture more tenants in the market. Eventually rates will come down across the board, but it will be a slow process playing out over the next couple of years.
Tenant Advisors INC., a Chicago area-based office space tenant representation firm, was established in order to give tenants more leverage in their office space lease negotiations. We believe tenants should receive unbiased advice, up-to-the-minute market information and aggressive representation.
It is our steadfast policy to never represent landlords or developers. This eliminates any conflict that can result from trying to represent the interests of both sides. It also ensures that our loyalties lie solely with you.
This approach, combined with our extensive experience, proven expertise and dedication to client service, set us apart from other brokerages.
Services include:
• Acquisition of leased and owned facilities
• Lease renewal and restructuring
• Disposition of surplus property
• Construction project management (in conjunction with outside consultants)
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