My customers are always asking me, “is this a good time to lease an office?”  Market psychology has in the past proved to be a strong indicator of whether we are in a tenant market or in a landlord market, historically a valuable tool to answer this question.  

In a tenant market, it is the tenant who has the leverage when negotiating lease transaction terms such as rent, rent concessions, construction dollars, and term flexibility.  This is the fun time for a tenant advisor where they can really show their creativity in imaginative ways to help structure a favorable deal for the tenant/client. 

In a landlord market, the first thing we notice is that the amenities such as free rent, term flexibility and construction allowances tighten significantly or even disappear entirely.  The last thing the landlord wants is for the rental rate, or the face rate, to go down.  In commercial office space the value of the property is determined by the value of its revenue collections as demonstrated by the rent roll.   

In the past, at any given time, it was relatively easy to know with clarity which direction the market was taking, and so we tenant advisors had strong signals showing us ways to structure favorable deals to create a win-win transaction.

In 2024, the psychology behind current market conditions have become more difficult to understand.  Are we in a tenant market, or a landlord market?  Or, as some are thinking, are we somewhere in between? 

My answer is that we may be in uncharted territory where the psychology of market leverage may be less important today than the reality of the new costs of doing business.  As we have pointed out in last month’s newsletter, the cost of constructing a turnkey office has more than doubled in the last few years.  This means that when new construction is contemplated, a longer lease term of ten years or more is now standard.

Tenants that are seeking short term leases of less than five years are now faced with the reality of the “as is” market.  It may prove very difficult to find a ready to go space with an existing layout that meets the tenant’s program closely.  The “as is” space tenant must surely be willing to make compromises.  The tradeoff here is that Landlords are providing very little in the way of an allowance to the entice these short terms tenants.  Short term deals are proving to be a short-term solution for some landlords that do not have deep enough pockets to finance major construction projects and tenants that are unwilling or unable to make a long term commitment.

By contrast, the traditional stable tenant that is able to make a long-term space commitment to landlords with deep pockets can negotiate a large construction allowance, free rent and many other attractive concessions.  Unfortunately, the number of traditional stable office tenants and landlords with deep pockets is clearly shrinking.  Many tenants are only now returning to the office full time with some still working on a hybrid work schedule.  Landlords have also been hard hit by rising construction costs and high interest rates.

So, what type of company are you?  Do you find yourself wanting to provide a stable long-term office solution for your employees who are now freshly back to the office or are you working with a much smaller inhouse staff that just needs a few offices for key employees and selective staff members. If you are having trouble figuring things out, why not give us a call to find out why, at Dickstein Real Estate Services, “Our Difference Is Your Advantage®”.

Regards,

Lawrence Dickstein