Office landlords pile on incentives, but not without paying the price

Office building owners, who were insulated from the downturn at first because of long-term leases, are now slashing rents and piling on incentives to retain tenants whose contracts are up. At Boston Properties’ GM Building in Manhattan, new tenants are paying 17 percent less in gross rents than former tenants did for office space there. SL Green Realty, which owns dozens of Manhattan properties including 100 Park Avenue and 1515 Broadway, offered 6.9 months of free rent and doubled its construction allowance for new lease signers during the third quarter. Sweet tenant deals come with a hefty price tag for owners, though. SL Green’s funds from operations dropped 28 percent in the third quarter year-over-year. According to SL Green CEO Marc Holliday, the large inventory of cheaper sublease space available has been a major contributing factor to declining rents and the need for incentives. Once that inventory is absorbed, he expects the office leasing market to improve. [WSJ]