Tenant Market Brings Bargaining Power to Office Space Construction | Tonkon Torp LLP

COVID-19 has shaken almost every industry, but never more so than commercial office space. Before the pandemic, downtown office spaces across the United States favored landlords in virtually every aspect of negotiations.

Then, almost overnight, everything changed. Remote work flourished, offices sat empty, and vacancy rates rose. Now, two years later, office leasing is a mixed bag.

According to a June 2022 CommercialEdge report, overall office vacancy rates were flat year over year, with the national vacancy rate remaining at 15.4%. However, this average does not say everything. Instead, some markets have recovered well, while others have languished – and the West Coast is still struggling. “The West Coast office hubs of San Francisco and Portland again saw some of the largest listing rate declines in the nation’s major office markets. Specifically, San Francisco rates ($62.57/sq.ft) were down 9.3% year over year, while office rates in Portland ($27.61/sq.ft) fell 7.5% year-over-year,” according to the organization. April Snapshot.

Likewise, Willamette Week reported this month that “vacancies in downtown Portland are increasing. Tenants lost 525,244 square feet of office space in the central business district in the first quarter of 2022.”

It’s a tenant market

These struggles mean that tenants in markets like downtown Portland may have had the upper hand, especially when it comes to tenant improvements. While every rental situation is different, market trends in downtown Portland indicate that landlords may be willing to offer much larger building allowances than in the past.

In some cases, a landlord may agree to “turnkey” the space, which means the landlord will take responsibility for a complete build. In other cases, tenants receive a building allowance, which is usually expressed as an amount per square foot of leased space. This amount is entirely negotiable, but it helps if tenants have consulted with experts and thoroughly explored their project needs.

Thinking outside the box and having a clear plan, based on the specifics of the market and each company’s situation, can keep tenant improvement negotiations on track and result in the best solution for tenants and landlords. Like I have noted before, for some industries, hybrid workspaces are likely to stay; building to accommodate this reality can result in a highly efficient space that maximizes labor time and minimizes real estate costs.

Beyond Tenant Improvements

Depending on the situation, negotiations may also go beyond leasehold improvements. In a tenant-dominated market, almost any aspect of rental terms could be up for negotiation, but only if the outcome works for both parties. Landlords may be willing to negotiate aggressively, but remember they have certain constraints. In fact, they may have lender covenants that prohibit certain reconciliations. It’s an unprecedented tenant market and situation, but the bargaining power doesn’t go beyond that.

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Sandy A. Greer