As commercial tenants keep a closer eye on their wallets than ever before, they are looking to spend less on their own offices, with many smaller firms choosing to renew where they are – a growing problem for landlords looking to fill unused space.
The burden is on landlords to be proactive in how they outfit space. As it stands, tenants are only moving to new digs if they find the long-term efficiencies – smaller offices or workspaces, leading to lower overheads – offset the short-term moving costs.
Some major property owners have turned to speculatively building out more polished spaces, in hopes that the nearly-finished, flexible offices will entice tenants that would rather not haggle over tenant improvements (TIs).
Closing The Gap
“Some owners have decided to take on some construction risk where they build out space for tenants lately, especially larger landlords that can buy construction a little cheaper and can afford to take on that risk,” said Benjamin Heller, managing director for Jones Lang LaSalle. “Construction pricing has remained high, so for a tenant to relocate and build out space, that’s a big dollar amount and it’s very time consuming. Landlords at all buildings are trying to come up with ways of easing that capital bubble.”
In the Class A market, tenants typically put about $150 per-square-foot into new office space, said Andrew Maher, Equity Office’s managing director. But when the landlord does a speculative build-out, the cost for tenants to move in is usually reduced to a mere $20 a foot.
Year-to-date, Equity has spent about $13 million building out space at 225 Franklin St. in Boston, 125 and 150 Cambridgepark Drive in Cambridge and elsewhere. They have already built and leased approximately 225,000 square feet this way, and have another 450,000 square feet of product in the works. Most of those spaces have been leased within six months, some in just a month’s time, Maher said.
“It’s pretty quick from delivery to start date of a new lease,” Maher told Banker & Tradesman. “The tenant can come in, put in phones and computers, and go to work. The gap between the cost to move and the cost to stay put is still pretty big, so this helps close it.”
Going The Extra Mile
In the suburbs, the tenants most likely to move – either through growth or consolidation – are technology companies, according to Peter Brown, director of leasing for Campanelli Cos. But tenants currently in the market are demanding that landlords provide turnkey construction projects. Landlords are also being asked to draw up endless variations on how the tenant might fit into its potential new home.
Last fall, Campanelli acquired 700 Technology Park Drive in Billerica as part of a portfolio grab. The 40,000-square-foot building had “substantial vacancy” when the company bought it. They increased the occupancy level 30 percent with two tenants, and have another 30 percent to go to get to full occupancy. Brown told Banker & Tradesman that the chief way they have filled the building is offering potential tenants a multitude of drawings to show the best ways they can efficiently occupy space.
“It really is a tenant’s marketplace, from the point of view of landlords being willing to do that,” Brown said.
And the larger the tenant, the more leverage it has when the time comes for finding a new home. Right now, there are some hefty tenants making these exact calculations. State Street Corp. occupies about 1.3 million square feet in various locations, but is expected to downsize its footprint to about 900,000 square feet by shedding excess space – although it is still unclear where.
And Brown Brothers Harriman is looking for about 300,000 square feet of low-rise space. According to sources, Brown Bros.’ most likely candidates are Boston’s One Federal St., where about 250,000 square feet of low-rise is available; 50 Post Office Square, where nearly the whole building is vacant; and 53 State St., where about 250,000 square feet of low-rise space is empty.
* This article was updated on Dec. 5 to include the correct headshot of Peter Brown.
