With the Tampa Bay area office market catching a minor case of what's infecting the housing market, commercial landlords have begun to offer a concession they've foresworn the past five years.
Can anybody say "free rent?"
Free rent re-emerged as a leasing strategy at the end of 2007, when some landlords realized they couldn't stem a rise in vacancies without boosting incentives, St. Petersburg commercial real estate broker Mike Talmadge said.
"I've seen as much as six months of free rent quoted, depending on the building," said Talmadge, who works for Echelon Real Estate Services. "A savvy tenant recognizes that vacancies create negotiating opportunities."
Why the landlord generosity? Job losses in fields such as housing, combined with fears of recession, are putting a crimp on office demand, brokers say.
The region netted an estimated 16,000 jobs in 2007, about half of the job total of 2006. In what the real estate firm GVA Advantis dubbed a "palpable pullback," vacancy rates have returned to double digits after hovering around 9 percent a year earlier.
Two of the previously strongest markets have suffered disproportionately from the slump. Downtown St. Petersburg, where just two years ago the vacancy rates stood at 5 percent, is coming to grips with 21/2 times the amount of empty offices.
Two large tenant defections, Progress Energy and Bankers Insurance Group, left plenty of cubicles begging for takers. Progress moved into a new
16-story headquarters downtown, freeing up offices at 100 Central Ave.
"About 239,000 square feet of vacancy was created just with the loss of those two tenants," Talmadge said.
Tampa's Westshore, by far the region's largest concentration of offices, is feeling its first spasm of pain. Vacancies have risen by a third, to 10 percent, from
7.2 percent. While below the Tampa Bay area average, it's not a trend that landlords relish with more than 500,000 square feet of new office buildings to come online in the next year.
"Westshore wasn't doing any type of concessions. Now, to see free rent coming back, it's indicative of uncertainly,'' said Michael Hoffman, a leasing agent with CB Richard Ellis.
One formerly hard-pressed office market has outperformed the competition. That's downtown Tampa. It's 16.3 percent vacancy was down a hair from a year earlier. A dearth of new construction there — the last office tower opened in 1992 — is helping its bottom line.
CB Richard Ellis' Anne Marie Ayers said she sees none of the distress of the last down cycle of the early 1990s. In fact, Ayers said companies are shopping around for more than 1.5-million square feet of deals in Greater Tampa.
"Our markets are in synch," Ayers said. "I'm telling you there's tenant demand in the market, and they'll pay for location and quality.''
Free rent allows landlords to give concessions without giving away the store. Building owners can maintain "face rents," the lease rates calculated in price per square foot. Keeping rents steady — at least on paper — keeps the building's investment value from slumping.
Brokers wouldn't reveal recent free-rent contracts, citing confidentiality agreements. But Danka Business Systems, in subletting downtown St. Petersburg offices last year to Bankers Insurance, lowered rent on the front end of the five-year deal, mindful of the fact that Bankers owes two landlords until its old lease in the First Central Tower expires.
Said Bankers spokeswoman Barbara Peat: "Obviously, at a time like this, there are creative leasing arrangements."