As dry a subject as you can get right? And landlords will maintain that they need inflation protection. Maybe. However tenants will often overlook the fact that when they agree to an annual % increase on a gross lease (i.e. one in which all operating expenses, taxes and insurance are included in the rate vs. a NNN lease where you pay these directly) that there is also a pass-through of increases of operating costs each year over a ‘base year’.
The net result is that you will be paying an annual increase over and above a portion of the rent which is already being increased by actual inflation in costs. i.e. this could be viewed as a ‘double-dip’.
In our latest OfficeIntelligencer we discuss the impact of potential changes in the way in which corporations would have to account for leases. And that the impacts would have been considerable and not all positive. My friend John Hanley, partner at Davis Wright Tremaine, has an update and maintains that FASB might be back- pedaling. Which for many, especially large retailers, would be good news. For his take on this far reaching rulings go to http://www.dwt.com/LearningCenter/Advisories?find=397323
The newest LEED office buildings have annual operating costs (taxes, insurance, utilities, management, janitorial etc) of approximately $8.50-$9.00/rentable square foot/annum. The cost of operating older buildings (10 years+) tends to be $2-3/RSF higher.
The ‘base year’ of a gross (fully serviced) lease (as opposed to a NNN lease which most of the newest buildings now use) should be the first full year of operations under a new lease. When evaluating the long term costs of occupancy be sure to take into account the long term impact of higher annual pass throughs of operating costs (to the tenant) each year after the base year. These can mount up and will impact your true cost of occupancy.
March 2nd 2011: In a surprisingly swift turnabout, several mostly empty highrise office towers in and near Seattle’s CBD are leased up.
The Russell Investment Center, 818 Stewart and 1918 8th all have announced major tenancies including a Amazon’s continued expansion of over 500,000SF. Only West 8th has any significant blocks of space left available (of this class of space) and we are likely to see landlords cut back on concession packages in the coming months.
It’s a different story for several other older generation downtown buildings which yet have gaping vacancies. And the market will remain very competitive for these spaces.
According to OfficeSpace.com “Vacancy rates in the Seattle Area Office Market crept slightly downward for the second consecutive quarter, reversing a nearly two-year trend. Absorption of office space also moved further into positive territory, resulting in the highest year-to-date figure that we’ve seen since 2007. Rental rates, as a whole, held relatively steady over the past six months, following two years of downward trending. ………… while not yet worthy of the term “recovery”, these factors combined are definitely a step in the right direction.”
At OfficeLease we’ve lived through three distinct commercial reals estate cycles the most notable being in 1988 when over 5 million square feet of new highrise buildings came on line in Seattle downtown alone. Rental rates fell precipitously.
After a slow recovery over the succeeding decade the Nasdaq climbed from 1000 to 5000 and the real estate vacancy rate correspondingly fell to the low single digits of a very landlord’s market.
The house of cards came down again in 2000/2001 on schedule with the dot com bust and it was once again a great time to be negotiating leases (if you were a tenant).
The cycle repeated itself with the Wall Street melt down of 2008. From which we are just starting to see some ‘steps in the right direction’ i.e. lateral steps at best…….it will be some time before we see commercial rental rates increase significantly. And in the mean time those who bought or built new product will have to adjust to the current reality of their unfortunate timing.
Paul Suzman pauls@officelease.com
