Press Room

The Challenges of a Tight Real Estate Market
by Marc S. Miller, The Facilitator, October 1998

New York City's commercial real estate market has been heating up for quite some time, as evidenced by increasingly tight vacancies in all classes of buildings. Continued tightening and a lack of speculative construction has created a new climate in the past 12 to 18 months, adding pressure on facility managers and their respective organizations to act quickly when considering office leasing alternatives. This pressure has changed the deal-making process for the foreseeable future — facility managers and their constituencies need to be aware of the challenges of a tight real estate market.

The vacancy rate for Class A buildings in Manhattan in the third quarter of 1998 stood at 3.6 percent. All buildings combined had a vacancy rate of 5.8 percent. The average rental rate offered was $41.86 for Class A buildings, $34.73 for Class B buildings and $31.28 for all buildings combined. Lack of new "spec" construction in the near future means relief is not in sight.

Just a few years ago, tenants had a lot of time to consider their options. Deals that used to take one to two years to complete now take no longer than six months from start to finish. If tenants wait too long, they will find that they have lost opportunities for their first, second, and maybe third choices. Time is especially urgent for smaller tenants who do not have the bargaining power of larger tenants. Losing out on choice opportunities leaves less desirable locations as the alternatives. In fact, both brokers and clients are adapting to this new market by broadening the geographic and economic parameters of a space search. One of the things our clients are telling us is that the company's office space is more important than ever in retaining and hiring qualified employees.

The number of suitable options available to most tenants has also decreased. With fewer options to consider, pressure on tenants and brokers has increased at the same pace as the market. Part and parcel of a broker's initial space availability report now contains a wildcard list of "future" space that has not yet reached the market. In the past, tenants would typically have up to 10 options to contemplate when a lease was being considered for renewal. Today, a tenant is fortunate to have more than a couple of choices. And the terms that tenants must settle on are far less favorable. Building owners are less likely to offer concessions, such as free rent or tenant improvement advances.

The nature of the transaction has also changed along with the market. The urgency to get deals done quickly means that brokers and facility managers must build a level of trust. The facility manager must feel comfortable that the broker is working for him, knows his needs and knows the market well enough to arrange a good deal. It is recommended that the client confirm early in the office space search whether the electrical and technology requirements can be easily accommodated in the preferred properties. Some properties, irrespective of age, cannot accommodate certain quantities of fiber and cable. This reduces the tenants' ability to cost effectively deal with communications and information technology requirements. In addition, focusing on buildings that offer flexibility, and that are easily divisible could save money in the future. The geometry of a building, its core placement (side, center, etc.) and floor plate size are also important things to consider.

A high level of trust and understanding is especially important with market conditions changing so rapidly. A knowledgeable broker can help all parties involved focus on the benefits and pitfalls of a deal and move it along rapidly or change course, saving precious time.

Marc has 21 years of experience in tenant representation and lease negotiation. He can be reached at (212)-286-8023.


Also check out the following article:
The Team Approach to Lease Negotiations
by Marc S. Miller, Real Estate Weekly, May 19, 1999