It is no surprise that, given the current state of the economy, there is an abundance of vacant office and industrial space in the marketplace, and tenants appear to have gained more leverage in their negotiations with landlords. As a result, landlords are offering significant concessions and are aggressively marketing their buildings and properties like never-before. Is this the new trend? How far will landlords go to keep their buildings occupied to maintain their rental income and cash flow?
According to the Urban Land Institute, in a recent report published with PricewaterhouseCoopers, landlords of multitenanted buildings with staggering lease rollovers should be able to weather the current market. Highly leveraged buildings that rely on income from one or two large tenants will suffer more significantly, as owners are unable to meet debt service requirements if those large tenants falter, contract their space or seek rent relief. In order to stay in the “leasing game,” landlords need to have sufficient cash flow and/or available lines of credit to complete tenant improvements and wait out significant free-rent periods. The warehouse and industrial markets may rebound more quickly than the office market as trade financing resumes and consumers feel more comfortable spending. When consumer spending increases and new homebuilding resumes, the warehouse and industrial markets should begin to rebound. In the meantime, landlords of office space have been more creative, while warehouse and industrial landlords are either waiting out the market or, if they have sufficient resources to build, aggressively marketing long-term built-to-suit transactions to a very narrow tenant market.
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