Column: It’s good to be an office tenant, but for how long?

Clark County’s economy has shown slow but consistent improvement during the first quarter of 2011, and the office leasing market has followed that trend. Business owners are feeling more confident, which has created an increase in leasing activity as tenants take advantage of this tenant’s market.

The Vancouver office market is seeing a small drop in vacancy rates. While there is room for some optimism due to the increased activity levels, confidence and positive absorption, there is still an abundant amount of office space available in Clark County. At the end of the first quarter, the overall office vacancy rate for Clark County was 21.22 percent, according to NAI Norris, Beggs & Simpson’s reports. Vacancy in Class B office space, the class with 40 percent of the office inventory, was just above 25 percent vacant.

The primary leading indicator for office demand is the unemployment rate. That rate improved to 10.5 percent at the end of March, versus 15.6 percent in March 2010. As the unemployment rate continues to decrease, office demand will continue to pick up.

In the current environment, leasing fundamentals still favor the tenant, especially those in a strong financial position. Tenants can leverage market conditions and improve their leasing position either financially or by upgrading their space. Most companies looking for space fall into one of two categories: those looking for a “flight to quality” with a desire to upgrade their space while maintaining or cutting cost, and those that want to reduce costs by downsizing or consolidating existing real estate.

Building owners are offering a number of concessions such as reduced rent, free rent and strong financial allowances to build space for the tenant. This may allow tenants who are confident in their financial future to lock in lower rates for a longer term, or even move into a building offering more amenities, such as environmentally friendly features, that they would otherwise not consider.

Landlords are under pressure to lease space and generate cash flow. However, the caution is that most landlords are careful not to take unnecessary risk, but are willing to be aggressive with tenants that have strong financials. Tenants with solid credit can take advantage of the market, which can be a win-win for both the tenant and landlord. The tenant can hold down costs while securing office space at a great value, and the landlord can begin a long-term relationship with a good tenant while bridging the gap until the leasing environment improves.

Another option for tenants encouraged by the existing market is to “blend and extend” their current leases. This happens when the tenant approaches the landlord as early as 12 to 18 months prior to lease expiration with the desire to negotiate current market rates or a blended rental rate, in return for a long-term extension. The obvious benefit to the tenant is reduced leasing cost, while the landlord benefits by ensuring a longer commitment from the tenant, and in some cases improve their financing situation.

Office tenants won’t have too many new projects to choose from in the next year. The only new delivery expected in 2011 is the Fisher Investments office complex in Camas, scheduled to be completed this fall, the majority of which will be occupied by Fisher Investments. Two other new development projects have uncertain timelines: Killian Pacific’s Library Square mixed-use project at the corner of Evergreen and C Street, and the 32-acre waterfront project located on the old Boise Cascade site. 

Given today’s leasing market, tenants have the opportunity to upgrade to higher quality space at a great value, reduce their rent to revenue ratio or receive rent concessions that would otherwise not be available. The pendulum will swing in the other direction eventually, though we don’t know when. If economic indicators continue to trend in their current direction consistently over a few quarters, office leasing fundamentals will move toward more of a landlord’s market.

Doug Bartocci, CCIM, is a senior salesperson in NAI Norris, Beggs & Simpson’s Vancouver office. He specializes in office leasing and sales, and can be reached at dbartocci@nai-nbs.com.

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