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Window for Bargain Rents Closing Fast for Big Tenants: when being the 800 lb gorilla hurts November 14, 2010

Posted by Bob Cook in Financial Planning & Analysis, Real Estate Markets.

Big users of office space have gotten used to throwing their weight around and getting what they want.  With the economic downturn, many have used their bargaining power to renew or “blend-and-extend” leases, relocate to better digs or consolidate operations.

The end of the party for big tenants, though, may be approaching … at least in some key markets.  Colliers’ Chief Economist Ross Moore provides interesting data in a blog post with an assertive title: “Office Vacancies are at Cyclical Highs, But Shortages Loom”.   He shows that “many cities have just a handful of options available to large tenants.”  One of those is LA where there is only one block of 200,000 square feet of contiguous space available downtown.  The same is true of downtowns in Philly and Cincy.  

Moreover, some tech and energy capitals … Houston, Seattle, and Denver … have fewer than five such blocks of space.  With their primary industries doing pretty well, it might not take too long for those spaces to go.  Consider: On-line-job-posting-aggregator Indeed.com shows Houston having 84K job postings, Seattle having 73K postings, and Denver having 56K postings … indications of the job growth that is starting to take hold.   How long will those big blocks of space be around?

The squeeze on large blocks of space results mostly from the dearth of new construction.  According to Colliers, if one ignores the large project at Manhattan’s 1 World Trade Center, there is only about 8 million square feet of office space under construction in downtowns across the U.S.   For comparison, I’ll add that in the past, it’s been common for larger CBD’s  like mid-town Manhattan and Chicago’s Loop, to have that much under construction all on their own.

Now … to be sure … it’s not time for office landlords, in general, to start partying.  Downtown occupancy rates will remain low for a while.  Mid-size to smaller tenants are going to have a lot of pickings to choose from and will continue to be able to demand low rental rates even as the big blocks of space get eaten up.  Landlords with large blocks will, though, benefit from the lack of such spaces.  Prices for those spaces will firm up quickly as landlords, anticipating the day when large blocks command a super-premium, become reluctant to lease at too low a price.  Landlords without large blocks of space, though, will continue to suffer.

This bifurcation of the market … the market for large spaces getting tighter and tighter and moving to a “landlords’ market”, while the market for middle-size and smaller-size spaces staying in oversupply and remaining a “tenants’ market” … will take many by surprise.  The conventional wisdom that large tenants can demand better rental rates than smaller tenants will become out-of-date.

For a period of time … until new construction is started to provide large contiguous blocks of space … it’s going to be better to be the one-ounce mouse than the 800-lb gorilla.


1. The Waterloo Market Changes « the informed tenant's Blog - December 8, 2010

[…] Waterloo Market, Waterloo real estate market by John Lind I read Bob Cook’s blog post entitled “Window for Bargain Rents Closing Fast for Big Tenants: when being the 800 lbs. Gorilla hurts” and it is fascinating to watch this scenario play out in the U.S. Bob expands on a report put out […]

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