Commercial Real Estate Frontline

I needed an inspection sticker for my car.  I pulled up to Peter’s garage, a local mechanic I have gone to for repairs and maintenance for over 10 years, and I noticed the 3 garage/storage bays in the rear of the building were vacant.  These bays had been leased to DHL for fleet maintenance for the past 3 years.  The last time I was at the shop, Peter was excited having just signed another 5 year lease with the global shipping giant.  Great rent, great tenant, so he thought.
Now the three bays were vacant and no bright yellow trucks were outside awaiting repairs.  I asked Peter what happened.  As it turns out, DHL, being forced to cease its ground operations in the U.S., had vacated the property just a few months into their newly executed lease agreement.  Peter was contacted by the downsizing company’s rep and was informed that they would be looking for a way out of their lease.
DHL continues to pay rent on time every month while they work out terms for a lease buy out.  Nevertheless, this leaves Peter with a 3,000 SF vacancy in a soft market.  He knows he won’t be able to match the rent his former tenant was willing to pay.
It is a common story among landlords this year, with more to come.  Consumer spending continues to dwindle and large companies continue to downsize.  Upcoming renewals for leases singed over the last few years are turning into tough negotiations, with the tenant in the driver’s seat.  Leaving landlord’s to accept lower rent or take on a vacancy and a larger blow to their bottom line.
Industrial properties in the greater Boston area have historically fared well through market downturns.  So, although in a tough spot, Peter should fair better than his counterparts in the office game.  The Boston Business Journal reports a vacancy rate of 17% in the Boston suburban office market at the end of 2008.  That is a 5% increase from 2007.  Escalating vacancy rates beget lower rents and give tenants seemingly unlimited choices and more leverage in negotiations.
What does this mean for landlords?  They need to stand out from the pack!  Now is not the time to be marketing your vacant space as “Negotiable”, put a price tag on it that is in line with current market conditions or offer a month or two rent free to get a higher rate,  get creative in your proposals, be reasonable in renewal negotiations and come up with an offer that will excite the tenants in the market for space.  In 2009 they will have a lot to choose from.
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