Member Viewpoint

My crystal ball needed more RAM.

Two years ago, market rates spiraled downward $5 to $17 for direct Class A office space in Dallas' Telecom Corridor. And I told 300 high-tech, start-up entrepreneurs and investors at a conference it was the buy of a lifetime. Based on what we knew then, it was.

Now, two years later, direct rates in the same market have dropped another $2 to $15. And sublease rates are running between $10 and $13.

Let's state the obvious - office landlords have not faced tougher leasing issues in the past 10 years. No doubt many lie awake at night with thoughts coursing through their minds such as?

• Are corporate layoffs leveling off?
• Have tenant bankruptcies peaked?
• Will vacancies get worse?
• With the Iraqi war over, will demand for space pick up?
• Can we refinance at current interest rates when I can't show a strong ten-year cash flow?
• With the higher-rate deals from '98-'00 starting to roll and expirations peaking in '05, how do I back-fill that space, and what rates do I charge?
• How long should I tie up space with prospects now demanding long-term leases to lock in today's low rates?
• How do I deal with good tenants who now are experiencing credit problems due to bankruptcies, layoffs and slow pays among their clients?
• How do I compete with subleases offering lenient credit requirements, dramatically reduced rent, in-place furniture and Telco equipment?
• How do I counter the aggressive competition levied by REITs that have an ownership structure that affords more latitude in negotiations?

All this, coupled with a two-year steep drop in office employment growth, leaves landlords feeling powerless while tenants are now able to flex a little muscle..

Could we now say that there are unsurpassable buys out there? Based on what we know now, we could. If you are a good-credit tenant in a poorly performing market, the world is your oyster.

Faced with some or all of the concerns listed above, landlords have a dilemma when a tenant comes in today on an early-to-market (ETM) deal. To retain the tenant and ensure that the space will be leased for the foreseeable future, the landlord is inclined to negotiate while knowing full well that the market could turn around years before the new lease is up. And here's how the tenant can benefit:

• Lowered overhead, increased bottom line
• Base year becomes current year, or expense stop established at current rates -- no more escalations
• Landlord pays to recondition and modernize space, and modifies parking, signage and other lease terms
• If relocating, landlord buys out or takes over existing tenant lease, pays early termination fees, offers free rent, moving and cash allowances, etc.

So from both sides of the table, when does it make sense to talk? Discussions can be worthwhile if the tenant has no more than two or three years to go on a five- to 10-year lease, and/or is willing to extend the lease by a like number of years. Anchor tenants, who obviously have the option to build in today's low-interest-rate environment, should begin discussions two to three years out.

David Lester, SLCR, BCCR, is executive vice president of GLV Realty Advisors, a Dallas-based national commercial real estate brokerage firm providing strategic end-to-end solutions in tenant representation for companies worldwide. To contact the author, please email dlester@glvrealty.com