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Dealing on a lease becomes the art of the tug-of-war

Tenants shuffling around in search of long-term, attractive lease deals

Metro Jackson’s office tenants are tending to stay put but are seeing a lot of “value alternatives,” a term the leasing trade applies to affordable opportunities to upgrade to a better space or move to larger quarters.

Those value alternatives have to come in mighty sweet to prompt a tenant to spend the money on a move, new furniture and new space build-out, said John Barton, senior vice president and senior asset manager for Jackson’s Parkway Properties. “Most owners are working with their customers to keep them,” he said.

Barton said the movement that has occurred has come as tenants move from one submarket to another, often lured by the “value alternatives.”

“In the class C I think a lot of users in the more poorly run properties have found they might be able to trade up in terms of product quality — pay a little more and get a lot more in terms of service.”

The value alternatives can also be paying in tenant movement from class –B to class B and class B to class A, and even class –B to class A, he said. Previous to the economic downturn and the evolution into a tenants’ market, “the gap between class A and B-minus was so large it didn’t make sense|” to contemplate an upward move.”

But today, “you can have some –B going to an A.”

For landlords and leasing agents, as jobs grow fewer and new business arrivals become scarce, “You end up calling on people who would not necessarily be on your radar,” Barton said.

He said the absence of new deals has created a churn he likened to a “big pot of soup” getting stirred.

John Michael Holtmann sees it more as a checkerboard that tenants move within. “I think the parallel to a checker game can be applied to the whole market,” said Holtmann, who handles leasing for Regions Plaza, among other properties, for Duckworth Realty.

The shuffling around matches a national trend that comes with stalled new construction.

Concessions are driving some of the moves on the checkerboard but not in the way they are in the overbuilt office markets of such cities as Atlanta and Phoenix, Holtmann said.

He said in many instances in Jackson, a lot of tenants are looking at a move and asking: Is it worth it? “They don’t see a lot of benefit to a move,” he noted.

What they do see is a chance to lock in at “historically low rates” for two, three to four years. The landlord might see it differently, Holtmann said, but the “flip side is the tenant is in the driver’s seat.”

Tenants suspect lease rates have hit a floor and want long-term leases. Landlords, on the other hand, are betting on rates recovering and don’t want to lock in.

Count Brian Estes among those landlords. “I generally won’t sign any more than a five-year lease,” said Estes of commercial real estate firm the Estes Group.

“I’m very reluctant, especially if I start low.

“I don’t want to take five years to get back to market (rates). I think there’s no question the market will be back in three years.”

Further, many landlords have high debt that precludes allowing tenants to sign lengthy low-rate leases, Estes said. “Signing a long-term at a low rate can really start affecting the value of your real estate.”

A lower rate for a shorter span is more acceptable for Estes. Faced, say, with a tenant who wants a 10 percent lower rate for two years of a renewal: “I’d take the lower rate for two years,” he said, noting he’d come up shorter letting the space stay vacant for four months.

But sometimes an unexplained psychology is at work in the shifting movements of a deal, Estes said. “Certainly, someone who wants a tenant is willing to do a better deal than an existing landlord. I don’t know why that is.”

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