Tenants Are Missing The Party
Where are all the office tenants? They are missing the party and who wants to miss a party? At the present time the Montgomery County office space market is experiencing one of the best tenant environments in the last 20 years. With a county wide vacancy rate of 14% for office space and an anemic flow of tenant activity, tenants have the opportunity to reduce occupancy costs and secure that reduction for the next 5 to 10 years.
Rents are as much as 30% lower than they were during the real estate boom period of 2005 – 2008. For a lease term of at least five years, concession packages include a significant tenant improvement allowance or a turnkey buildout, which is when the tenant and landlord agree to a layout plan and the landlord completes the buildout at the landlord’s cost in accordance with the agreed upon plan.
Additionally, landlords are using the dreaded “F” word. Probably not the “F” word you are thinking about, although I am sure the “F” word you have in mind has been muttered in many landlord offices during the past 24+ months, I am referring to Free Rent. A client of mine is negotiating a deal in the I-270 corridor that includes 7 months of free rent, a buildout valued at approx. $50 psf, rent that is 20% below the asking rent, reasonable annual rent increases and a lease term commitment of 10 years and 5 months. This particular client will recognize an annual occupancy cost savings of over 25% from their current location. If you have outgrown your space, have an expiring lease, are just sick and tired of the 1980’s lobby finishes in your building (personally, I prefer 80’s music to 80’s lobby finishes) or maybe you need to transition from a home based business to a commercial property, now is the time to get out there and take advantage of the great opportunities.
With little, if any, speculative office development likely to occur in Montgomery County, other than a couple of buildings in Bethesda, over the next three to five years, the window of opportunity will likely only last for about another 12 – 18 months. This, of course, ass-u-mes that Congress can figure out how to balance the budget and keep the economy from going into another recession.
Once businesses start leasing space, the vacancy rate will decline and a lower vacancy rate will flip the office space market to the landlord’s favor. When this happens, rents will increase; landlords will have smiles on their faces as the “F” word, free rent, will be seldom heard. Not many good things come from a bad economy, but if you are a tenant with an office space requirement, there is a silver lining to the past several years of poor economic conditions. Enjoy it while you can.