Rental Market
Rising rents force firms to think ahead
Puget Sound Business Journal (Seattle) - by Greg Berry
• A letter arrives reminding you that your company has an option to extend its present lease. However, the lease states that the extension shall be at the "current market rate."
Your present rate is in the high teens and the proposed rate is $36 per square foot. It must be a misprint. After all, your company moved into the building just five years ago.
• You look at space in an older Class A building in downtown Seattle. A friend of yours moved into the building three years ago and is paying about $16 per square foot. Now the leasing agent you're touring with is quoting $32 per square foot. Can she be serious?
• Your company is being forced to move to accommodate the expansion of an adjoining tenant. You are currently in a fairly large building, but your landlord doesn't have space for you. You look in another building and find space that will work. Your offer is just under the asking rate.
After all, you're certain there is some room to negotiate down from what you've been quoted, right? A few days later, you discover there are three other offers on the same space. At least one is at the asking rate.
You've heard these stories countless times over the past 24 months. Situations like these are happening daily in today's Puget Sound real estate market.
Two years ago, there were a variety of good options for Class A space under $18 per square foot in Seattle's central business district. Now, it is mind-boggling that leases for non-air-conditioned space in a Class C building are being renewed at over $20 per square foot, while rates in the top tier buildings exceed $40 per square foot.
The increases of 40 percent to 50 percent in the past year have sent companies looking for different options.
Higher rent part of business
Rate increases are disconcerting for everyone. However, some businesses, in particular national companies, take the news better than most and pay the new rents without much resistance. To them, the increases are a matter of course -- they have experienced high rents and skyrocketing increases in other metropolitan markets across the country.
For example, Class A space in San Francisco was $22.62 per square foot in 1993 and reached $45.12 at the end of 1998. In one instance, a representative of a law firm relates how rates in its Bay Area office went from $45 to $60 per square foot last year.
A healthy outlook is to view the current rent situation as part of doing business in a thriving region. It is a sign of our strong business climate and if you want to be in Seattle, that's the cost of space.
Moving an expensive option
Just as lease rates have increased, tenant improvement allowances have decreased, making a move more expensive than staying where you are. In many cases, these allowances only cover the cost of paint and carpet and no alteration to the actual space.
If the space was built a long time ago, it may need extensive updating and reconfiguration. In addition, in today's high-tech era, installing the communications and network infrastructure necessary to do business can cost between $3 and $10 per square foot, markedly increasing the cost of moving to a different location.
Also, in a new space, these installation costs can run as much as 25 percent of the entire tenant improvement budget.
Further, there are other factors to consider in the expense of moving, in particular the cost of the disruption to operations and the effect on employees. In the final analysis, unless there are more strategic reasons to move, the cost of relocating may exceed the cost of paying the higher rent. Many tenants come to the conclusion they need to grin and bear it.
Leaving CBD one solution
Companies locate in the downtown central business district for two main reasons: The need to be close to their clients and the need to present a strong image, complete with marble floors and impressive wall decor.
However, the attractive lease rates of the 1980s enticed many companies to move to Seattle, even those that didn't necessarily need to be in a downtown high-rise. Now these same companies, faced with the rate increases, are content with moving to a suburban, slightly less expensive market, and aren't concerned about losing a sense of prestige.
In fact, many prefer these options.
High-tech firms that moved into the city a decade ago are finding they can move to outlying areas to preserve the rate structure they have been enjoying. At the same time, the move can actually enhance the culture they promote, one that sometimes didn't blend well with that of the traditional companies in town.
Still other companies are looking for more cost-effective space downtown and are willing to compromise the quality of the building. With a mix of new and old facilities, this is possible because of the range of rents of various buildings.
For service employees who travel to their clients' offices, functional is far more important than prestige, particularly when savings are shared in some form of profit sharing.
A few years ago, building owners were reveling in the fact that vacancy rates would continue to fall and rents rise. It was said that tenants would not have a choice.
In fact, the past year has brought a number of completed building renovations such as the Seattle Trade & Technology Center, 1000 Denny Way, the Polson Building and Smith Tower.
Although rates have increased significantly, these new options were added at the lower end of the rent spectrum, allowing many companies with more affordable space.
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