South Florida’s shaky economy means lower rental rates in South Florida, and it has also shortened rental terms, especially in the industrial sector.
Landlords and tenants are increasingly negotiating shorter-term, three-to-five-year agreements for industrial properties, both new deals and renewals of existing leases.
“The reason that you’re now seeing shorter leases is that tenants don’t want to lock in for a long period of time,” says Lucy Carvalho, an associate at Miami real estate firm CresaPartners. “They don’t know how the business is going to be performing in the next few years — so they’d much rather renew a lease for the least amount of time possible. The landlords don’t want to lock in at a low rate, but they want to keep tenants, so they’ll revise the situation three years from now.”
Edward Redlich, vice president of ComReal Miami, said he recently negotiated such a deal for a 10,000-square-foot Class A warehouse in America’s Gateway Park in Doral, in the hard-hit Airport West market.
“We negotiated a rate that was probably $3 per square foot below where it had been last year, and negotiated on behalf of the tenant for a five-year term.”
Redlich, whose company works with tenants and landlords, said landlords have gone as far as negotiating month-to-month tenancies in some cases.
“We have some existing space that we represent, 200,000 square feet at one particular warehouse complex, and some tenants don’t want to commit to a long-term situation. So we’re renting to the tenants on a month-to-month basis, below market rate,” he said.
It’s mutually advantageous in a tough environment, particularly in a region where the real estate business is so central to a functioning economy.
“It helps them, and it helps us, because we have vacancies,” Redlich said. “The landlords are happy to get the income flow, and the tenants are happy to get the low rate. We give them two weeks notice of a potential long-term tenant, and if that happens, then we work to move them to another space.”
Craig Melby of the Melby Group said he has seen examples of shorter terms in the Palm Beach market.
“We’re seeing a lot shorter terms, because landlords are hoping things will get better — so they’re happy to do shorter leases at today’s low rates, and tenants are always happy to do short-term leases,” Melby says. “There are so many vacancies that mean rents are way down and because of that, landlords do what they have to do — we’re renewing leases right now at rental rates below what tenants paid three years ago. Whether it’s a renewal, where the landlord says, ‘I’ll renew you for a year, let’s see what happens in a year,’ or brand new deals where they’re hopeful things will get better.”
Melby describes a set of adjusted attitudes across the board, with a new average lease term of three years.
“In my career I’ve never seen a market this bad and I wish it wasn’t this bad — but it is what it is. Most landlords are accepting of that and are not taking it personally.”