Tenants Offered Several Options to Save on Occupancy Costs

April 9, 2009
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For corporate tenants looking for new space in the Tucson market, opportunities abound to capitalize on lower rates and increased concessions such as free rent, increased tenant-improvement allowances, reduced security deposits, and, in some cases, even cancellation or contractions/expansion options, according to Michael Coretz, principal in ITRA/Commercial Real Estate Group of Tucson, LLC, a real estate advisory firm.

Like all markets across the country, Tucson is experiencing high vacancy rates of more than 10 percent in retail, office, and industrial spaces. Building owners are pressured to strike deals because of the competition for tenants and their own mortgage refinancing issues. Clearly, these market conditions have opened up numerous options for creditworthy corporate space users to negotiate rates and terms that deliver significant savings off overall occupancy costs. In the Tucson market, even eager sublessors who are seeking to reduce their surplus space liabilities, are offering dramatically lower-than-market rates and numerous concessions.

Coretz says that even if a lease is years away from expiration, early renewal and lease restructuring can be a viable cost-savings vehicle. “Most proactive landlords have paid attention to the market trends and decided that it is much more cost effective for them to retain tenants—even at a reduced rate and/or reduced square footage—than run the risk of carrying liability of vacant space. As a result, proactive landlords are coming back to the bargaining table to entertain renewals and restructures on leases as far out as two to three years.” According to Coretz, this equates to a win-win for both landlords eager to extend current occupancy and tenants who have the opportunity to realize short- and long-term savings.

However, Coretz advises commercial tenants that before negotiating any lease they need to be armed with a strategic real estate plan that corresponds directly with their business plan with projections for the next three to five years. He cautions that without a clear idea of future space needs, committing to a new or longer lease—despite cost or size reduction—is extremely risky. “Where is the benefit of locking into a lower-cost five-year lease only to discover that you didn’t need half of the space two years from now? Conversely, what if you negotiated a space reduction in an extended five-year term and realize you actually needed that space two years later? In both cases, chances are that the cost if adjusting your real estate to match your future, unanticipated needs would negate any cost savings realized now.”