- Office landlords are going to great lengths to persuade hesitant tenants to sign new leases.
- It’s resulting in some pretty sweet financial incentives for businesses looking for new locations. –
- See the top ten benefits that office landlords are currently providing, including more flexible leases.
If you aren’t looking for a new office space right now, you may be missing out. With vacancies on the rise, many office landlords are doing whatever it takes to sign leases, including lowering rents.
Insider spoke with four high-profile office brokers who represent both landlords and tenants, as well as a lawyer who works on leases, to find out what kinds of perks are being offered.
We discovered that landlords are providing a slew of financial incentives to entice a potential tenant, ranging from one-year lease extensions to more generous rent abatements. They are also coming up with novel ways to provide greater flexibility during a period of uncertainty about the future of hybrid work and the overall health of the economy.
According to Risa Letowsky, co-chair of Adler & Stachenfeld LLP’s leasing practice group, flexibility is the difference between successful and struggling landlords right now.
“Flexibility is absolutely key, the landlords who are embracing that are doing much better than the landlords who aren’t,” Letowsky said in a statement.
The following is a list of the top ten office landlord perks.
Lease terms that are flexible
The typical office lease term is eight to ten years. Given the uncertainty surrounding hybrid work and the economy, landlords are increasingly willing to let tenants sign shorter leases. Landlords are also charging a fee for early termination rights, which allow tenants to leave a lease before it expires. It means tenants will not be obligated to pay the entire lease amount if their plans change.
Floor plans that are adaptable
Landlords are also providing tenants with expansion and contraction rights if they are hesitant to sign a lease because they are unsure how much space they will require.
According to Mike Watts, CBRE’s president of investor leasing, some landlords are allowing tenants who sign a ten-year lease to increase or decrease their total square footage during the first 36 months. Andrew Lustgarten, executive managing director of leasing for Savills in Los Angeles, described a tenant who takes a floor-and-a-half of space and then has first refusal on the other half of the floor for the duration of their lease. Landlords have traditionally disliked including these clauses because they bind them to keeping space available for specific tenants, but they are increasingly giving in to get leases signed.
Free rent has always been a part of office lease negotiations, but it has always been calculated on a fixed basis of one month free rent per year of the lease. The rules have changed, according to Michael T. Cohen, Colliers’ tri-state region president. According to Franklin Wallach, executive managing director of research and business development at Colliers, free rent in New York City has increased more than 500% for renewals and more than doubled for new leases since 2008.
Abundant tenant improvement funds
Tenant improvement funds are not a new concept. When a tenant signs an office lease, it is usually for an empty space that will be built out and paid for in advance by the landlords through a tenant improvement fund. In New York City, tenants have traditionally been able to expect landlords to offer around $150 per square foot, amortized over the term of the lease by their monthly rent.
Even as rents have fallen, landlords have not reduced the amount of money they will put up for renovations. “For a landlord, it’s one thing to give $150 a foot tenant improvement allowance when your rent is $100 a foot, it’s yet another thing to do it when your rent is $60 or $70 a foot, and yet everybody is doing it,” said Cohen.
A look through their books
Of course, landlords require funds in order to pay for tenant improvements. “Can they really afford to build what they’ve agreed to,” Cohen went on to say. “Right now, it’s caveat emptor (the Latin phrase for buyer beware).” Landlords have historically been “loath to share” this information, according to Cohen, but they are now more willing to provide tenants with information about the loans that secure a building as well as their overall financial health. Some landlords are also putting tenant improvement funds in escrow to ensure that tenants receive them.
Lease extensions that are shorter
Landlords prefer tenants to renew their leases because it lowers the cost of finding a new tenant and reduces the likelihood of a vacancy. Landlords are increasingly willing to take what they can get, which means they are more likely to agree to shorter lease extensions rather than another ten years. “I would say 98% of landlords will say okay to a one-year lease extension right now,” Lustgarten went on to say.
Specify the space
As more tenants seek turnkey office spaces, demand for spec suites, or pre-built office space for small and medium-sized tenants, has skyrocketed. “If you sign a typical lease tomorrow, by the time you do plans, permitting, and construction, in LA, it will probably be a year before you move in,” Lustgarten told me. “With these spec spaces, you could move in the next day if you want to.” According to Watts, most smaller deals are now spec leases in some markets, and landlords have adopted the movie Field of Dreams’ motto: If you build it, they will come.
Large conference rooms that can hold all-hands meetings take up a lot of space, even if they’re only used a few times a month by businesses. To help businesses offset these costs, landlords are constructing large conference centers that tenants can rent for a small fee when holding large meetings.
Landlords can also assist tenants who are unsure about the space implications of hybrid work by providing coworking space. If too many hybrid workers arrive on the same day, the space can be used as an overflow space or rented out for short periods of time.
There is a growing demand for amenities that will attract workers back to the office, which is fueling the “amenity arms race,” according to Michael Lirtzman, the Chicago-based head of office leasing agency leasing at Colliers. Landlords are upgrading their “old Holiday Inn-style basement gyms,” according to Lirtzman, by providing group fitness, personal training, or spa experiences. Some are even bringing trendy sports facilities to the office, such as a golf simulator or pickleball courts. Another big draw is improved food service, such as barista-staffed coffee shops and outside space for food trucks.