Major cities might not be as profitable for leasing as they seem

Aug.August 24, 2011 02:47 PM

Well-leased commercial buildings in major markets may not be as profitable as
many commercial real estate investors believe they are, the Wall Street Journal
reported. According to an analysis by Costar Group, many leases in top
markets such as New York City, San Francisco and other areas are set
to expire next year. And because of the weak economy, tenants might be
demanding significantly lower rents than they otherwise would. In
Manhattan, Costar found that despite recent gains,
current office rents are still nearly 28 percent below their peak prices in

Many of leases signed during the previous cycle in the second
quarter of 2007 and second quarter of 2008 were short-term in nature,
for a period of about five years, and are therefore up for renewal
this year. “In places where many rent contracts were signed well
above current market prices, landlords will have a hard time finding
tenants who will pay anything close to that rate,” said Chris Macke, a
Costar strategist.

In comparison, rents in Houston and Philadelphia
are only 5 percent below their their peak, so landlords have a better
chance of finding tenants willing to pay higher prices. But Matt
Bronfman, COO for Jamestown Properties in Atlanta,
said that rents in cities like Houston and Atlanta didn’t fall as much
because they weren’t that high to start with. He said cities with
barriers to new supply and an influx of white-collar jobs are the most
attractive. “That means we have a bias toward the major markets.”

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