Office Rent’s Up – Leading All Sectors – Office Tenants Are Seeing the Bottom of the Rate Trough
Moody’s/REAL National Office Properties Index which measures annual transactional volume in the commercial real estate asset classes has reported a 4 percent increase in office prices in the second quarter 2009 compared with the first quarter 09. Rates had been on the rise since 2002 when they fell dramatically and steadily starting second quarter 2007. This is the first time since the second quarter 2007 – two years – that office rates have increased – a strong argument that the bottom has been reached.
Office leasing has been under pressure from falling real estate values, failing investments, substantial reductions in commercial lending and reduction of commercial mortgage backed securities – a tail-spin of depression variety. This up tick in the rent index reflects a major sea-change in the nose dive direction of commercial real estate. For office leasing tenants who have enjoyed short-term lease extensions and concessionary lease deals, the tide is turning and further evidence that the Great Recession is in the beginning stages of its death rattle.
Corresponding with office rate increases will be the tightening of supply as very few new office buildings have been built in the last 18-24 months. As tenants begin to re-focus their attention on growth and hiring for that growth, occupancy will see increases simultaneously with limited supply which in turn will see rising rates.
Rent increase, while minimal at this moment, will have impact on the pre-existing mind-set of recession-era companies who maintain a belief in bargain hunting. With building owners now clearly showing they have limits in their borrowing power to satisfy hungry tenant improvement needs, tenants may find the right buildings increasing in rent while the wrong buildings languish. The slow movers in lease rates do, however, play a key role in accommodating lower-end tenants as they move up in quality.
Main-stream, large corporate tenants which plan well and require a long-term, professional approach to lease management will be the first to face a toughening of the rent curve.
The Great Recession has been a blood bath for many tenants and owners with every major indicator in the basement. Of the various bits of improvement in the US economy, Moody’s/REAL National Office Properties Index increase of 4% is a strong leading economic indicator in the health of US commercial real estate and a road map for tenants to plan for a tighter market and increased costs.
Christopher Desloge is a three-decade veteran tenant representative in office leasing, authoring The Tenant’s Guerilla Guide to Office Leasing and publishing the website officetenant.com. Mr. Desloge is Chairman of the Tenant Rep Agency, LLC specializing in office tenant representation throughout the US. The Tenant Rep Agency, LLC has teamed with HOK, the largest architectural firm in the world to provide office leasing tenant with tenant representation brokerage services coupled with space planning, tenant development, construction drawings and construction administration all at no cost to the tenant. Tenant Rep Agency website is http://www.tenantrepagency.com