Oversupply of office space enhances renter's leverage

SOFT MARKET IS TIME TO DRIVE HARDER DEAL

May 20, 1991|By Audrey Haar

While some company executives are sitting tight and waiting for the economy to pull out of the recession, others are using the current market conditions to their advantage.

Elinor Bacon used the soft rental market as an opportunity to move her development and real estate consulting company, Bacon & Co., from Charles Village to Charles Street in the Mount Vernon area.

"At another time I would not have been able to move," Ms. Bacon said. She increased her office space by about two-thirds -- and now has an affordable downtown location that allows her to walk to meetings. "The location is fabulous. It's a dream I didn't know I could fulfill for a while."

Landlords -- who once told tenants shopping for office and commercial space to take it or leave it -- are making deals to snag tenants. They're offering free rent, buying out old leases and negotiating rental packages.

The office market is overbuilt and there are many deals available, according to Thomas Burns, senior vice president of Carey Winston, a Chevy Chase-based commercial real estate company.

Relocating to take advantage of the competitive commercial leasing market could be a viable option for companies that have two years or less left on their present lease and are planning to expand or shrink in size.

Landlords are generally offering concessions with a package of discounts from 15 percent to 30 percent off rent and office improvement costs, Mr. Burns said.

The most attractive rental packages usually are offered by owners of new buildings. Some aggressively court tenants by offering to buy out their current leases for up to 18 months, to give three to 12 months of free rent and to throw in substantial office improvements. But to negotiate a good deal, tenants must be prepared to sign at least a five-year lease.

Meanwhile, it is also important for tenants to take a hard look at the financial health of their landlord -- just as landlords are scrutinizing tenants more carefully for creditworthiness. If the developer is on the verge of going bankrupt or losing the building to the bank, you could find yourself with a succession of landlords whose primary interest is selling the building, not maintaining it, Mr. Burns said.

Tenants can also negotiate new terms with their current landlord -- and take advantage of the soft rental market without the upheaval and expense of moving. At renewal time, try to negotiate a lower rent to reflect the current market rates. Ask for new paint, carpet or other office improvements.

Tenants who have a small space in a building dominated by larger tenants also can talk to their landlords about reducing costs by giving up some square footage. "Some tenants may be sandwiched between anchor tenants who want to take over their space," said Steven Gassaway, vice president of CB Commercial Real Estate Group in Baltimore.

The Candler Building at Market Place between Pratt and Lombard streets, near the Inner Harbor, provides some examples of the turmoil among tenants.

The recently renovated 535,000-square-foot office building is the new home for several area companies.

Alexander & Alexander Inc., a national insurance brokerage and risk management consulting company based in Owings Mills, recently moved its Baltimore sales office several blocks from the USF&G Building to the Candler Building.

By moving to the new location in February and negotiating a more favorable rent, the insurance company will save $1 million annually in rent for its 7,200 square feet of office space.

"Our desire was to stay downtown and reduce costs," said William Mulroy, vice president of real estate for Alexander & Alexander. "It also has a better view of the harbor than the [offices we had in the] USF&G Building," he said.

Another new tenant in the Candler Building is Cigna Bonding Services, which is moving to its new office early next month.

After sharing office space with other Cigna divisions in Columbia for five years, Michael Myers, bond manager for Cigna, said he wanted to move his 10 employees back to Baltimore. He said his goal was to find a location that was more centrally located and also near restaurants and shopping.

While he could have negotiated a similar rental rate in Columbia, Mr. Myers said, he prefers a downtown Baltimore location. The staff lives in and around Baltimore, and the city location will shorten their commuting time.

On the industrial and warehouse side of the commercial real estate market, most of the clients who relocate seek to reduce costs by finding a smaller space, said Mitchell Gold of Parker Frames & Co., an industrial real estate company in Baltimore.

Even though developers are offering attractive rates -- often with free-rent bonuses -- few companies are moving or expanding, Mr. Gold said. He pointed out that tenants who stay put are getting more attention these days because landlords are shifting their focus from developing new properties to maintaining their present holdings and keeping tenants.

Landlords won't be so cooperative forever, real estate experts warn.

Mr. Burns of Carey Winston says the market is tightening up slowly and will not be as competitive a year from now. "I don't think it will last forever. There is no new construction," he said.

Mr. Gassaway of CB Commercial Real Estate Group thinks the present market will stay the same for about another year, but "If you wait a year or two years, the window could go down on you."

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