Source: The Wall Street Journal

May 06, 2017

New York landlords Roll Out Freebies to Attract Tenants

Manhattan office landlords are boosting their use of sweeteners such as free rent and remodeling cash to entice tenants to take space, according to brokers and market reports. The average value of free-rent periods and landlord payments for remodeling top-tier office space, known as concessions, hit $173 a square foot in the first quarter in Midtown, up 3.3% from a year earlier and about 2½ times its level a decade ago, according to research by real-estate services firm Savills Studley. Competition from new office space, especially on the far West Side and downtown, and a long-term trend of tenants packing more people into less square feet are forcing landlords’ hands, brokers said. A bevy of new projects opening soon are adding to landlords’ stress. “They are well aware of a whole bunch of space the market knows is available but is not yet in the [vacancy] statistics,” said Matthew Barlow, a Savills Studley executive vice president and director. “Landlords are trying to get ahead of those headlines and rent as much space as they can.” A few years ago, owners of office buildings were offering rent abatements between five to seven months and tenant-improvement contributions of $60 to $70 a square foot, brokers and real-estate executives said. Today, brokers said, tenants get offers of anywhere from 12 to 15 months of free rent and landlord contributions reaching $85 to more than $100 a square foot.

While concessions have been climbing since the last recession, brokers and analysts caution the increased incentives aren’t viewed as a sign of impending doom in the office market. Historically low interest rates, for example, make the concessions more affordable than in past real estate cycles. “Higher concessions are not always a sign of a weak market,” said Tristan Ashby, director of New York research for JLL. “As long as interest rates are low, owners would rather offer larger concessions today for higher face rents going forward.” Among those most aggressive with tenant concessions have been landlords interested in preserving or boosting rent levels to maintain or increase the building’s value, brokers and real-estate executives said. These owners can negotiate higher rents with tenants, offering to cover a significant portion of construction costs and sometimes even taking on the complex task of managing an office buildout. They can make their return when they refinance, recapitalize or sell their properties. At the same time, tenants today now expect a “cool look” for their office interior that is more expensive than traditional office space, said Christopher Schlank, co-managing partner of Savanna, a real-estate investment manager. In addition, companies are hewing to the conservative approach they adopted after the financial crisis. “No one wanted to spend capital,” said Paul Myers, executive vice president at real estate services firm CBRE Group Inc. “We’ve never 100% gotten away from that mode, so landlords have to give large work letters to keep up with construction costs.” The rise in landlord concessions for office tenants isn’t distributed evenly throughout Manhattan’s submarkets and often depends on the type of building and its owners’ investing goals. Rising concessions in the broader market have had less of an effect in the small tenant market, said Brian Steinwurtzel, co-chief executive of Newmark Holdings, which caters to small businesses often occupying 6,000 square feet or less. Many older buildings geared toward smaller tenants have been converted to residential uses, reducing competition for Newmark. “Most of our buildings are located in neighborhoods that are getting better,” Mr. Steinwurtzel said. “We are buying into neighborhoods where demand is increasing.”