By John Schaffner
The glut of office space available in Buckhead and Midtown is resulting in Atlanta businesses looking for new office space and asking for “ridiculous leasing concessions” according to more than one panelist at a recent discussion.
At the Nov. 17 “Doing Deals in Difficult Times” breakfast briefing sponsored by Arnall Golden Gregory LLP at Two Alliance Center some 400 commercial landlords and leasing agents convened on the 30th floor of the new Buckhead high-rise office tower to hear forecasts from four real estate experts: Donald Miller, chief executive officer and director of Piedmont Office Realty Trust; Chris Port, senior vice president of asset services for CB Richard Ellis; Rudy Prio Touzet, chief executive officer of Eola Capital, and Casey Wold, senior managing director of Tishman Speyer, developer of Two Alliance Center and a co-host for the event.
Most of the panel agreed the market had bottomed out or was near bottoming out, but that a recovery from what has taken place in the past year or two may take five years before the market gets back to normal.
The panel moderator was Phillip Skinner, a partner with Arnall Golden Gregory, a member of the firm’s commercial real estate practice team and co-chair of its leasing practice.
“There is fear and loathing in Buckhead” Port told the crowd. He said in a typical market, tenants could expect about 10 months of free rent on a 10-year lease. But now, because of the perceived weakness of the commercial market, tenants are asking for almost two years of free rent on long-term deals, he said.
Port and others agreed it is the same story on tenant improvement allowances, another type of concession.
Improvement allowances typically ran about $25 per square foot, but now some tenants are asking up to $80 per square foot. The stance of the four panelists, however, was that they are not dealing on that basis in Buckhead.
Skinner asked the panelists what the velocity of deals currently is in Buckhead with five new buildings and 2 million square feet of new space coming on the market.
Port said both Buckhead and Midtown “are challenged right now.” He said the markets are looking at five to six years of historic absorption before they will be back to normal. He said activity now is down two-thirds from what it was a year ago.
Port also predicted there will be another six to 12 months delay in decision-making on leasing. “After that I expect we will get back to business as usual,” he stated.
Wold said he anticipates continuing to give up front-end concessions to obtain new leases—such as in the Two Alliance Center. He said he is signing 10- to 15-year leases and “can expect to be leased in two to three years.” Miller said there is a lot of broker- or tenant-driven activity “that likely will not get done.” He said a lot more of the activity is “tilting at windmills.”
Asked what steps they need to weather the storm in the market, Prio Touzet said, “Retain tenancy is paramount.” He also suggested controlling expenses and looking at the company’s own portfolio.
On the debt side, Wold said it is important to get ahead of the curve. “The easiest debt extension will take 10 months to complete,” he added. Port explained that tenants are seeking rent relief. “Of those who asked for relief, 15-20 percent really needed help,” he added. Miller supported Port by stating, “Rarely does a tenant improve finances by getting rent concessions.”
Responding to a question as to how long in advance leases are being renegotiated, Port said, “It depends on the ownership and the credit of the tenant.” However, he said the earliest he personally had redone a lease is four and a half years in advance of its expiration.