Deals Run the Gamut as Result of Downturn

[IMGCAP(1)]LOS ANGELES-Brokers will tell you that every deal is unique in its own way, but they will also tell you that office rents and terms were a lot more predictable before the downturn. In today’s world, according to three Colliers International office specialists who spoke with GlobeSt.com, office deals vary so widely in just about every respect that it’s nearly impossible to generalize except to say that it’s definitely now a tenants’ market.

“All sorts of things are happening at the negotiating table,” says Chris DuMont, a managing director in the Downtown L.A. office of Colliers who specializes in West L.A. markets. DuMont cites the example of one transaction that began with the tenant and the building owner negotiating a seven-year deal that included a $50-per-square-foot tenant improvement allowance and a rental rate above $4.25 per square foot. By the time the negotiations ended, the deal was a two-year lease that included only painting and carpeting as new improvements.

[IMGCAP(2)]DuMont contrasts today’s conditions to those of the recession of the early 1990s. In those days, West L.A. building owners would often agree to a certain amount of free rent–often one month–for every year of a lease. “There is no formula now,” DuMont says. With so few transactions closing, he adds it’s hard to peg just where the market is on any given deal.

Tenants and landlords are both willing to agree to the shorter terms these days, according to the Colliers brokers. “We’re seeing a lot of short-term deals across all the markets right now,” says Brent Bissell, a Colliers associate vice president who specializes in the West L.A. market and explains that both sides in the negotiation are often willing to renew for a short term today.

[IMGCAP(3)]“For the landlords, the capital expenses are low, and the tenants are saying it’s fine with them because it means they don’t have to pay an out-of-pocket expenses for a move,” Bissell says. He and the other Colliers brokers tell GlobeSt.com that the short-term deals amount to landlords and tenants both being willing to take the same bet: Renew for a short term and hope that conditions are more in your favor a year or two from now.

Despite the tendency toward short-term deals, some longer and larger leases are being signed these days, notes Shaun Stiles, a Colliers senior vice president who works the Tri-Cities (Glendale, Burbank and Pasadena) and Downtown markets. At one end of the spectrum are leases that can be as short as 12 to 18 months with the tenant agreeing to live with the space as-is; at the other end are long-term deals in which the building owner will give $50 to $60 in tenant improvements and significant concessions, including free rent.

Although building owners throughout L.A. generally are willing to offer more concessions today, the level of concessions for the most part is higher in markets like the Tri-Cities and West L.A., according to Stiles. “For the most part, rates have held a bit better Downtown on an asking basis than they have in some of the other submarkets,” Stiles tells GlobeSt.com, although he adds that the Downtown rates also have dipped a few percentage points since last year.

One reason that the Downtown rates have held better is that they didn’t shoot up like rents in some of the other markets, Stiles explains. In addition, much of the best office space in Downtown L.A. is owned by a handful of landlords, who “have held rates fairly well over this decline,” Stiles points out.

The concessions described by Stiles, DuMont and Bissell include the free rent that typically becomes commonplace in a downturn. But depending on the deal and the landlord, some building owners are willing to credit some tenant improvement allowances toward free rent. As DuMont explains, “The landlords are definitely looking at soft dollars rather than hard dollars when they can.”

Some of the largest L.A. area leases lately have been signed by law firms, some of which have been expanding in L.A. despite a nationwide trend in which firms have been dissolving, both here and elsewhere. Other industries that have been accounting for significant deals include healthcare, engineering, energy-related and technology firms, according to Stiles.

When the leasing market will turn around is difficult to fathom, Stiles observes, but he says that many in the market believe that more stability and predictability should return by the end of this year or early next year. “Rates have come down pretty substantially in some submarkets, and that has translated into more activity that is producing some deals,” Stiles says. An uptick in activity should eventually lead to more stability in rents and terms, he says.