Brokers Working Longer Harder For Downtown Miami Office Leases
Written by Yudislaidy Fernandez on April 22, 2010
By Yudislaidy Fernandez
In a fiercely competitive downtown office market, brokers are working harder and longer to get tenants to sign the lease.
Landlords are approving deals they never thought they would, local brokers say, and this willingness to sharpen pencils is stretching negotiations from months to years in many cases.
Jack Lowell, leasing agent for 750,000-square-foot Met 2 Financial Center, says the process is taking much longer today because tenants are starting their search early without having the worry of an expiring lease.
Price is another motive because tenants are getting competitive offers from several buildings as few boast full occupancy.
Mr. Lowell, vice president at Flagler Real Estate Services, also attributes delays in deal-making to what he refers to as the "bright idea syndrome." If one tenant can persuade a landlord to offer a more attractive leasing package, such as signage rights for smaller tenants, he says, others who hear about the terms want the same treatment.
When this happens, Mr. Lowell says, it extends the process and piles on more documentation.
Mr. Lowell has said he has six deals in the closing process at Met 2 and Mellon Financial Center, and one of those he says he’s worked on for two years.
With newly-built office towers such as Met 2 at 345 Avenue of the Americas (Northeast Second Avenue), Mr. Lowell says another complication is that tenants are generally concerned about when construction will finish and the building’s final appearance.
"Everybody wants to cover in the document what will happen in the case of eventualities," he said.
Met 2’s office tower is to finish construction this quarter, he said.
Existing landlords are also stepping up their game. After a tenant signs a letter of intent with a new building, he says, the current landlord makes an appealing offer to convince the tenant to stay.
As two of downtown’s new office towers, Met 2 and 576,379-square-foot 1450 Brickell, began to announce many of the leases they have recently inked and those in the pipeline, Mr. Lowell foresees leasing negotiations running a little smoother for future deals.
Also, he says, businesses’ outlook is more positive now as many expect to grow and are not as worried about the future as they were last year.
This could translate into more tenants looking at upgrading office space and some even expanding, which many tenants weren’t even conceiving in 2009.
"Last year, tenants were pretty unsure of their business plans, so law firms particularly have been going through a period of adjustment and were shy on making a commitment and were inclined to take less space. They were not being aggressive about expansion plans," Mr. Lowell said. "This year, I see a difference in outlook, more positive expectation that they will be growing in the future, so we are negotiating harder on expansion now."
Matthew Goodman, a tenant rep broker, says tenant reps are putting together aggressive deals because that’s the only way to get tenants to move from their current locations.
"What you are having is that it is taking a long time for landlords to approve those types of deals that are very aggressive and outside initial underwriting," said Mr. Goodman, principal of CresaPartners in Brickell. "…They (landlords) can’t believe they are having to do deals like these. The better the deal is for the tenant, the harder it is to get the deal done."
Since tenants are pursuing very aggressive deals, in many instances landlords have to get the lender to also sign off on contracts because some could pull the building’s profitability down, he explained.
These deals often include discounted rents and concessions like free rent and tenant improvements.
It’s common, he said, for transactions to take from 18 months to over two years to complete.
It takes so long to incentivize the tenant, Mr. Goodman said, because you have the existing landlords putting in counteroffers to those of other prospective office bases.
So far this year, the office market is showing signs of stability, but activity is still slow.
A new market report shows asking rents remained stable but the vacancy rate kept climbing in the first quarter.
Average asking rents for the Miami office market were $30.53 per square foot, up 1.4% from $30.34 per square foot at the end of last year, according to a Cushman & Wakefield first quarter report.
The overall vacancy reached 18.5% at the quarter’s end, a 1.5% percentage point increase from 17% at the end of 2009 and highest since the third quarter of 2003, when it topped out at 18.6%, the report shows.
The city’s office market tallied 48,639 square feet of negative absorption this first quarter, meaning more space entered the market than was taken up. But at least the figure dropped from the same period last year, when negative absorption hit 360,111 square feet.
Tere Blanca, who handles leasing at recently completed 1450 Brickell, agrees some transactions in the past 18 months have taken longer than usual to cook, but she expects the timeline to shorten this year.
The waiting was reflective of the economic uncertainty tenants were grappling with last year, she says, not knowing what direction the economy would take.
Many of those tenants had 2010 and 2011 lease expirations, so they were taking their time shopping around for the best deal.
"Many who started the process early were saying "Maybe we should wait it out a little because we might get a better deal,’" explained Ms. Blanca, president and chief executive officer of Blanca Commercial Real Estate. Her firm is the first to move into the new office tower.
Tenants are also coming into the market earlier, fishing for lower rates and competitive terms and not in a hurry to close.
Ms. Blanca says she’s seeing more extended negotiations on certain parts of the lease, for example larger tenants wanting more flexibility built in.
In smaller transactions, deals are closing in about four months, Ms. Blanca noted, and larger leases are taking a year or more.
For example, she says the 10.5-year, 115,000-square-foot lease with law firm Bilzin
Sumberg Baena Price & Axelrod — the first completed — was signed in less than a year.
"It’s not unusual for a transaction this size to take a year," she said.
Bilzin had first committed to move into the under-construction Brickell Financial Centre at 600 Brickell Ave. but later reversed its plans.
The leasing process generally involves several phases. First, tenants spend time analyzing the office market and touring prospective buildings. Then they create a short list and do a request-for-proposal process with those buildings, Ms. Blanca explained. Then, tenants and landlords go through the counter-offer process until finally the tenant hammers out a letter of intent and proceeds to conclude the lease’s terms with the legal team.
"No matter how quick" the tenant goes through the steps, she said, "it’s still a time-consuming process."
1450 Brickell hasn’t officially announced additional leases but it is reported three have been inked recently. She says several others are in the pipeline.
Ms. Blanca says her leasing team prefers to make leasing announcements once the transactions are fully done. Plus, she says some tenants want to make a big splash about their lease and others simply don’t.
"We make announcements when we are ready to make them, not when the market wants us to," she said.
CresaPartners’ Mr. Goodman agrees some tenants don’t want to attract attention unless it is directly about their business. In other instances, he said, landlords don’t want tenants sharing the types of deals they got with other tenants in search of space.
When it comes to the leasing process, Ms. Blanca doesn’t foresee negotiations taking as long this year as they did last.
Tenants new to the market, those expanding or those with six months to two years left on a current lease are likely to work on sealing deals now to take advantage of competitive rates, she said.
"Everyone is feeling the pressure to try to expedite the process and complete transactions faster today than a year ago."