Leasing brokers are facing pressure from all sides in L.A.’s office market. With abundant inventory available — and more coming online soon — many prospective tenants feel they’re in the driver’s seat for negotiations and expect rental rates to come down. But among some landlords, the rising rents are only stoking anticipation that businesses will continue to clamor for new space, and they aren’t budging on rates. The end result is a slower pace of negotiation, as both owners and tenants look to mitigate risk and maximize benefit.
“Tenants are being cautious in an environment that has seen rising rents over the last couple of years,” said Andrew Lustgarten, corporate managing director at Savills Studley. “Additionally, the increased upfront focus on workplace strategy and cost analysis has extended the amount of time it takes to complete transactions.”
The numbers don’t look great for office owners. There will be 5.9 million square feet of new construction hitting the Greater Los Angeles office market in the first half of this year, according to Colliers International. And the third-quarter office vacancy rate remained high at 14.5 percent. However, office rents jumped over 7 percent from the year-ago quarter, to an average of $2.98 per square foot per month, according to Colliers. While high vacancy rates generally put tenants in a better bargaining position, landlords need to charge higher rents for new spaces to make their projects pencil out — and most aren’t backing down, brokers said. But that puts concessions in play.
So, what does it take to attract office tenants in these mixed conditions? Top leasing brokers share the nitty-gritty about the fine art of landing a tenant.
Senior executive director, LA Realty Partners
What are some of the common leasing terms these days? Securitization continues to be an increasingly critical lease issue, especially in a hot tech market, so landlords are being more diligent about underwriting their lease risk. Credit profile drives securitization, and the need for incremental securitization for companies in a “startup” role and/or with a limited financial history is increasingly becoming a critical negotiation point.
What is making tenants hesitant about leasing? We are in extra innings of this market cycle, so there is a growing concern about signing a long-term lease at the peak of a cycle. But a vast majority of my clients are viewing the leasing market as more favorable versus an acquisition. This is largely due to the flexibility and minimal capital outlay required in a lease transaction when compared to a purchase.
Are you still seeing clients focused on downsizing or rightsizing? Rightsizing. Tenants are focused on efficiency. Many of the clients we represent are optimally in the 125 square feet per person ratio, which is about a 75 percent reduction from five years ago. Why spend money on excess space when you can utilize these dollars to reinvest in your company?
What are the extreme lengths you’ve gone to in order to land a tenant? I spent 10 years of pursuit to land a particular Fortune 200 account. In another instance, I was with a client that absolutely loved tennis, so I joined his tennis club. I joined the same men’s team that had predominantly former pro and Division I tennis players, and I played in a variety of tennis tournaments with him. It was a great “win-win” because I was in my early 20s, so getting picked up in his Maybach, winning tennis tournaments in SoCal and building a great long-term client relationship was really special.
Corporate managing director, Savills Studley
What are tenants’ priorities today? Tenants have a greater focus on the importance of workplace in attracting and retaining talent. We are partnering with our clients to act as strategic consultants in studying the way organizations occupy and use space prior to concentrating on the real estate transaction.
Is there anything out of the norm that you’ve seen regarding concessions? Landlords with new construction are offering more generous concessions packages. We are typically seeing one month of free rent for each year of the lease term, and there have been several transactions where tenants have received north of $100 per square foot in TIs.
Millions of feet of new construction in the L.A. office market is slated for delivery in early 2018. How does this affect leasing? For the last couple of years, there has been a decrease in availability along with rising rents. However, we have seen a slowdown in deal velocity over the last three to six months. This decrease in volume, along with the considerable amount of new construction scheduled for delivery, will likely lead to a further stabilization in rents this year and a possible decline in 2019.
What are you doing to land tenants in light of current leasing conditions? I cold-call relentlessly. I try to be present at every event to help expand my network of clients and colleagues, in and outside of the U.S.
Are tenants more interested in new office construction versus existing? If it’s in a great spot, usually close to the decision makers’ homes and near public transportation and great amenities, tenants will definitely consider new construction. Especially if rates are competitive and it’s amenity rich. These are the realities of a tight market.
How does all the new inventory coming online impact leasing terms today? A lot of this construction is centered around markets that have very little available space and that have seen rising rates. As supply widens, sometimes rates fluctuate and competition is more intense.
Are you seeing an increase in pre-leasing activity? We have seen great pre-leasing when the project offers what every user wants in an area that is seeing great demand, including creative office layouts, open floor plans, amenities and great design. For example, at The Mix at Harman Campus [a 44-acre mixed-use complex in the San Fernando Valley], we were able to pre-lease 55 percent of the project, and this created wonderful momentum, which has been great for current leasing activity.
Are you noticing tenants making conservative choices in terms of how much space they rent? The propensity right now is to optimize. We have been seeing moderate to consistent growth in many sectors as companies continue to improve earnings. However, companies are using different ways to manage their footprint and improve operating efficiencies, including incorporating new technologies and workplace solutions. Generally speaking, tenants are learning how to be more efficient with less space while at the same time being flexible to account for future growth and expansion.
Principal, Cresa Los Angeles
Are tenants more interested in new office construction versus existing? Tenants today, at least the tech and media companies, are more interested in moving to the building that works best for them — it doesn’t necessarily need to be new.
What sorts of office leasing deals have you seen lately? Historically, most lease terms have been three to 10 years, and occasionally up to 15 years for a very large tenant. In the past 15 years, we’ve negotiated many leases for emerging growth companies that are less than three years. For larger tenants — let’s say a full-floor or larger — that are more established, we typically negotiate leases in the range of five to 10 years. For this longer range, we are always trying to negotiate rights to expand or contract and/or terminate early.
Have many tenants have been interested in taking on extra space to sublease out? Companies that would lease excess space with the idea of subleasing would typically do so if it is a sizable amount of space that they won’t need for a number of years into the future. To successfully sublease it, it would have to be built-out to a standard that works for the typical subtenant and also works for the company that eventually plans to expand into it. Given the high cost to design, build and furnish space, along with the cost to sublease it, we don’t see a lot of companies employing this strategy. We think a better solution is to negotiate for expansion rights, which allows companies to grow into space without having to warehouse it before they need it.
— These interviews have been edited and condensed for clarity.