Leasing Obstacles for Today’s Office Tenants

By Gregory Tanner | May 2017

An office space search can be very overwhelming. Whether an organization is building out a new space or renovating an existing office, these processes have become even more challenging in Boston’s dynamic and costly office market. An experienced real estate advisory team can save tenants significant time and money.

During a number of recent client meetings with organizations with lease expirations within the next 12–24 months, conversations have revolved around three major talking points: timing, construction costs, and tenant credit.

TIMING: A number of groups we have spoken with over the last quarter thought that because their office lease expirations were 14 months away, they had plenty of time to address real estate requirements. But that is simply not the case. As you can see by walking around Boston, new developments are being built in almost every submarket (eight office buildings and over 9,600 residential units, as well as the Wynn Casino in Everett) and as a result, trade labor is in high demand. There are also much longer lead times in ordering materials such as glass and specialty items like lighting fixtures, finished millwork, and flooring. And certain aspects of the approvals process are being delayed as well; fire alarm inspections can have an eight-week lead time, and an appointment to receive a certificate of occupancy can take as long as two weeks from the day a request is made. As a result of these extended timelines, we advise our clients to begin analyzing the market and exploring options 18–24 months before lease expiration. For our larger clients, (100,000 SF-plus), we start this process at least 36 months before their lease expirations.
CONSTRUCTION COSTS: They’ve increased about 33% over the last five years. What does this mean for tenants? Longer lease terms and potential larger out-of-pocket buildout expenses. In order to amortize large tenant improvement allowances, owners need to require longer lease periods. We’ve also seen instances of office space buildouts rising to $90/SF, from $70/SF three years ago. If property owners can only provide up to $70/SF because that is what they underwrote, tenants may have to pay out of pocket for that $20/SF difference or work with their advisory team to revise their space plan.
CREDIT: A company’s credit is a major variable to consider in the search for a new office. Organizations need to be realistic about the financial condition of their businesses and upfront with their advisors, especially early-stage companies without established track records. Landlords planning to invest significant capital in building out a tenant’s space need to be sure that the tenant can pay the rent. By being open throughout this process, tenants and their advisors can avoid wasting time on unrealistic space options and focus on value spaces, such as a second-generation office that may only need some cosmetic upgrades, or an attractive sublease.

It is essential for office users to engage a full-service real estate advisory firm well in advance of their lease expiration. Even if tenants intend to renew their leases, a cohesive team—attorney, architect, general contractor, etc.—led by a knowledgeable market advisor will help to organize this process, negotiating the most favorable terms and avoiding any unnecessary and costly pitfalls.

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