The Reata BizBlog: 2009 Office Demand Falls Sharply from 2008

A report from Cushman & Wakefield reported that DFW office occupancy fell by 2 million square feet in 2009 and total leasing activity was down 43 percent.  Not surprising given the current economic situation, I know.

But like in most cities, there are winners and losers within the greater metropolitan area.  Buildings along LBJ Freeway and downtown Dallas were hit hard with lots of tenants moving elsewhere or just closing their doors.  The big winners were Plano and Frisco because those submarkets are close to where people live.

Quoted rental rates didn't change much though.  This seems odd when demand is so low.  You would think rents would be lower.  Well they actually are, but landlords prefer to give free rent and higher concessions to "buy down" the rental rate than to reduce the face rate shown on the lease.  So the average effective rental rate is lower even though the number shown on the lease is higher.  This allows the landlord to get the pain of the current market out of the way and then have good rents in the future.  This also helps them if they decide to sell the building in the future because the buyer won't have to deal with the free rent which should have burned off by then.

So what does this mean for companies whose leases expire in 2010?  

First, there should be lots of options from which to choose.  So allow yourself plenty of time to look around and negotiate.  I recommend that you start the process 3 months prior to the date on which you have to exercise your renewal option.  If you don't have a renewal option, start 9-12 months early.  That may seem like a long time, but if you move to a space which requires construction, you can eat up 9 months in a hurry.

Second, you should shop the market to see what's out there before blindly agreeing to renew your lease with your current landlord.  You wouldn’t buy a $40,000 car without shopping around a little first.  So don’t sign a lease which totals $500,000 or more without shopping either.

Third, you might want to consider trading up to a higher-quality building if image is something that might increase sales or allow you to hire better employees.  Or you might be able to move to an area close to home or close to customers.  Who knows, the landlord may pay for some or all of your move.

Finally, hire a corporate real estate advisor (tenant rep).  When I was a landlord, I found that landlords could get a 10-20% better deal for themselves when tenants handled their renewal directly compared to those tenants who were represented by a tenant rep. Don't hire any broker though.  Only hire one who specializes in representing tenants exclusively.  If the broker also represents landlords, you might find yourself in a situation where the broker is trying to juggle his loyalties to you and the landlord.  You don’t want to have to question your broker’s motivations or recommendations.

Have a great 2010 and happy hunting.