Cut Rates, Rent-Free Months—Office Space Is Becoming a Tenant’s Market

Looks like it’s haggle-time in midtown commercial real estate.

Class A office space has become, believe it or not, more negotiable, with tenants finagling more rent-free months and bigger allowances to improve their spaces, according to a new analysis by Jones Lang LaSalle.

“With the regular Class A population, tenants appear to be negotiating better concessions and more of a discount,” said Cynthia Wasserberger, a senior vice president at the firm.

Ms. Wasserberger analyzed 10 Class A deals completed in the last quarter of 2007 and the first of 2008, together comprising 822,200 square feet in midtown Manhattan buildings like 1633 Broadway, 909 Third Avenue and 340 Madison Avenue.

During negotiations for these leases, tenants convinced landlords to give them an average of seven months free rent and $43 per square foot for improvements to their office space.

That’s quite an improvement over 2007, when landlords only gave midtown Class A tenants a paltry $27.15 per square foot and just 3.5 months of free rent.

In these 10 recent deals, tenants were also able to negotiate starting rents 9 percent below the original asking rent.

“We can see without question that concessions have shown a considerable increase,” said Ms. Wasserberger.

The stats don’t surprise Mark Weiss, an executive vice president with Newmark Knight Frank, who said that “effective prices have fallen in the past three months by 10 percent” for Class A commercial space.

“That means slightly lower rent, slightly more work and slightly more free rent,” said Mr. Weiss. “However, they’re still 10 percent or 20 percent more expensive than they were a year ago. Rents have another 10 percent to fall.”

Yet, it’s not all footloose and rent-free for high-end tenants.

Lessees in so-called “trophy” properties—i.e., towers like the Solow building at 9 West 57th Street and the steel-and-green-granite cloud-buster at 590 Madison Avenue—aren’t having as much success on the negotiation front.

Such buildings remain impenetrable to any but the über-elite, or, as Wasserberger politely phrased it, “the price-insensitive.”

After analyzing 14 deals totaling 673,000 square feet in trophy properties, Ms. Wasserberger determined that tenants won an average of five months of free rent, as compared to 3.7 months in 2007; and $34.61 per square foot to make improvements, in contrast to $29.84 per square foot the year prior.

Tenants only convinced property owners to negotiate a starting rent about 6.5 percent below the original asking rent.

“With a limited amount of space and tenants desiring good presence, view and light commensurate with how they would like their firm perceived, that part of the market is still very resilient,” said Ms. Wasserberger. “Really, the trophy market is out of equilibrium since the vacancy is so low.”

More meaningful is the increasing size of the concession packages in Class A space.

As Ms. Wasserberger put it, “The concession packages are the first thing to change when the market starts to change.”

Cut Rates, Rent-Free Months—Office Space Is Becoming a Tenant’s Market