It's a tenant's market

Currently fashionable gloom and doom market reviews need to be taken in historical context.

Did we expect the record-breaking development and absorption pace of the past three years to continue forever? Conditions in the office market in Columbus are similar to conditions in 1997. Vacancy rates are higher than they have been for a few years. The recent construction slowdown will give the real estate market a chance to catch its breath.

Existing market dynamics make the site selection process more complicated than ever. Today’s economic climate has created a tenant’s market for office space — both in the suburbs and downtown. In the Columbus office market today, there is an ample supply of brand-new office space and second-generation space and an abundance of sublet space.

While many companies are taking a wait-and-see attitude toward the economy, some have decided to shop the market now due to their expectation of top quality space at fire-sale rates.

While there are bargains, businesses need to be aware of a few realities. Rental incentives will be offered to tenants with excellent credit ratings who require substantial amounts of space and are willing to sign a lease for five years or longer. Smaller users or start-up companies will not provide a landlord enough security to qualify for leasing incentives.

Here are some items to consider if you’re in the market for new space:

* Many newer buildings in the Columbus market have been constructed with tax abatements. That alone can save a great deal of money over the life of your lease — and makes it hard for older properties to compete. Although developers of new space are motivated to maintain their quoted rates for their buildings, they may offer several months free rent or lower the rate for the first year.

* Existing properties are fighting to retain tenants while developers are eager to fill empty new spaces. Because of the brand-new Class A space available in the market, owners of second generation Class A or Class B properties are much more willing to offer incentives to lease space there. Periods of free rent and higher tenant improvement packages, relatively new to the Columbus market, are available.

* One result of the changing economic environment and corporate consolidation is that there is more sublease space available than ever. Because many tax abatements are granted for a 10-year period, it is possible to find sublease space that still benefits from tax abatement. Subleasing, or taking over a lease from another tenant, can save you up to 40 percent of the quoted rental rate.

* Commercial real estate agents, with their in-depth knowledge of the real estate market and the leasing process, save clients time, headaches and thousands of dollars. Interview several real estate agents to find one you are comfortable working with. Make sure that person has both the experience and the tools to support your decision-making process.

Commit to working with one company — a good agent is going to make sure you visit all available properties that fit your space requirements. Check Top 25 lists or look for property listing signs to find real estate agents active in your area.

In addition to finding tax abatements to help you save money, commercial real estate agents can assist you with savings in other ways. A client needing 20,000 square feet of office space recently received a State of Ohio Job Creation Tax Credit for creating 25 new jobs at 150 percent over minimum wage. That could impact your rent as much as $1 to $1.25 per square foot per year. Sometimes locating in a Community Reinvestment Area is as simple as selecting one side of a street rather than the other.

The length of the real estate decline will be a factor in the economy. In Columbus, interest rates are low, unemployment is low and inflation is low. The Columbus real estate market has never experienced a prolonged downturn.

The Columbus industrial market has already turned the corner — leasing activity picked up substantially in third quarter. Sublease space is being absorbed rapidly in the office market. If you’re hoping to pick up bargain office space, you’d better get started now.

If your lease is due to expire in the next six to nine months, now is the time to go out kicking tires.

Michael E. Young is principal and managing director of the Columbus office of NAI Welsh, a full-service commercial real estate company providing service to clients worldwide. He can be reached at 280-4822 or [email protected].