Monday, September 21, 2009

Nashville business tenants benefit from landlords' deals

Nine months of free rent proved to be the deal clincher for Conservation Services Group as the nonprofit energy services firm scouted Nashville for office space earlier this year.
That generous kicker on a five-year lease for 6,200 square feet is one example of how aggressive some landlords have become to attract or keep business tenants.

"The pendulum has swung from a landlord's market to a tenant's market," said Whit McCrary, a principal with Colliers Turley Martin Tucker, who helped Conservation Services negotiate its lease at Metropolitan Airport Center.

Vacancy rates in a pair of office submarkets near Nashville International Airport stood at 16.8 percent and 22 percent as of June 30, according to real estate firm CB Richard Ellis. Downtown had a similarly high 21.5 percent vacancy rate. Other parts of town have better occupancy.

Amid an economic downturn that has caused real estate values to decline, more businesses with leases expiring are shopping around and winning concessions.

"There's so many great opportunities elsewhere that it's looking like we're going to get better space at a similar or lesser price," said Mac Hardcastle, a senior adviser at NMG Advisers, which is exploring options as its current lease nears an end.

Other businesses are more likely to stay put or seek shorter-term leases. That has put pressure on landlords to start renewal talks earlier, or to offer deals to sign tenants.

The owner of Oaks Tower in the airport area, for instance, is pitching one year's free rent on the top floor for a tenant with good credit willing to commit to seven to 10 years.

"The market's just low right now," said Thomas Frazier Baker V, a Memphis-based commercial leasing adviser working with the property's landlord. "The easier and least expensive option for tenants … is to stay put and see how things go with the economy."

Some submarkets are more full

In lease negotiations, how much leverage each party has is generally determined by the length of the potential lease, the amount of money that must be spent preparing the space for occupancy and a tenant's creditworthiness. Landlords that spend a lot on tenant improvements are less likely to offer free rent on top of that.

Deals, meanwhile, are harder to come by in office submarkets such as the Green Hills/Music Row and West End/Belle Meade areas, where less than 6 percent of space was vacant at midyear.

"There are some tenants looking for airport-type deals in Green Hills and West End, and some landlords are not there yet," said Tom Hooper, a broker with Eakin Partners LLC.

The airport submarkets have more vacant space, in part, because some regional insurance companies with offices near the airport have downsized, and advances in technology make proximity to the airport less important overall, Hooper said.

Developer John T. Rochford, who owns buildings, said landlords should guard against becoming too aggressive with offers of free rent.

For potential tenants, a building's quality, parking and how convenient it is for workers and visitors are other crucial factors, Rochford said. "The best-run organizations are going to focus more on all of the factors and not just price."

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