CORRECT(10/27): Office Landlords Cut Rents, Up Concessions
("=Office Landlords Cut Rents, Up Concessions To Stave Off Vacancies," at 7:30
p.m. Tuesday, misstated the number of fewer leases SL Green signed in the New
York during the third quarter in the 10th paragraph. The correct version
follows:)
A.D. Pruitt
Of DOW JONES NEWSWIRES
NEW YORK -(Dow Jones)- Some of the country's top office building owners
reported that they're slashing rents and increasing tenant incentives to keep
their buildings filled during one of the worst commercial real estate markets in
decades.
Boston Properties Inc. (BXP), owner of the GM Building in Manhattan and other
trophy properties, reported Tuesday, after the market closed, that gross rents
declined 17% when comparing what new tenants are paying with the rent that had
been paid by old tenants occupying that space. Boston Properties also reported
that leasing in its total portfolio, which includes 146 properties, declined 2.4
percentage points to 92.1% compared with the end of 2008.
The results follow similar releases Monday by SL Green Realty Corp. (SLG), one
of New York's largest office landlords, and Liberty Property Trust (LRY), of
Malvern, Pa., which owns 700 properties including offices and light
manufacturing. The two firms' funds from operations, a closely watched metric in
the real estate industry, declined 28% and 10%, respectively, in the third
quarter compared with the same period last year.
Company officials tried their best to be upbeat. "While competitive market
occupancies continue to erode, we may be seeing the first signs of what will,
with no doubt, be a slow market recovery," said Bill Hankowsky, Liberty's chief
executive, in a written statement.
The office market is getting pounded by the economic downturn as businesses
shed workers and put off leasing decisions as they wait for clearer signs of a
recovery. In the third quarter, companies vacated 19.6 million square feet of
space throughout the country, the equivalent of over six Empire State Buildings,
according to Reis Inc.
So far the financial losses haven't been too severe. Boston Properties, for
example, reported that its third-quarter revenue of $377.3 million was actually
up from the same period in 2008, when its revenue was $357 million. Meanwhile,
SL Green's revenue declined 7% to $249.6 million and Liberty's rose 2.7% to $
187.5 million.
But bigger problems are heading their way. Office buildings often don't show
financial strain in the early stages of a downturn because they're occupied by
tenants who have signed long-term leases. As long as their tenants stay in
business, they can actually see revenue increases because of escalation clauses
in their contracts.
The pain starts hitting when the leases expire. In tough markets, landlords
typically have to spend a lot to retain or attract new tenants through brokerage
commissions with such incentives as free rent or interior construction. The
growing cost of attracting tenants is a major factor that's cutting into funds
from operations.
Also, because rents have declined sharply in most major markets, new leases
carry lower face rents than the leases that are expiring. Nationwide, effective
office rents fell 8.5% in the third quarter compared with the same period in
2008, according to Reis. Effective rents take into the account the cost of free
rent and other tenant incentives.
SL Green during the third quarter beefed up tenant incentives, adding nearly
an extra month of free rent to 6.9 months and offering new lease signers a
construction allowance worth $56.19 per square foot, up $23 from the third
quarter of 2008. The company said that average starting Manhattan rents were $
47.31, down from $66.78 during the same period last year. Also, the company
signed 11 fewer leases in the New York during the third quarter compared with a
year ago.
"We already knew rents were down is here is the proof," says Michael Knott, an
analyst at Green Street Advisors.
While landlords are wringing their hands, the few tenants who are fortunate
enough to be signing leases these days are getting great deals. For example, ECT
Capital LLC, a unit of Fortis Bank Nederland, recently signed a lease for 20,000
square feet in a building owned by SL Green. John Lizzul, a commercial real
estate broker at Newmark Knight Frank who represented ECT, said his client
received six months free rent and $90 per square foot in tenant improvements,
which will be used partly for terrace furniture.
SL Green CEO Marc Holliday said during an earnings call Tuesday that rents
have dropped so steeply partly because there's a large inventory of high-quality
sublease space available for leases over 10 years. He predicted that market
conditions will improve once that sublease inventory is absorbed. He also said
he expected a turnaround in the second half of 2010.
At the 4 p.m. EDT close of trading on the New York Stock Exchange, Liberty's
and SL Green's shares were down 4.2% and 5.3%, respectively. Shares of both
companies have risen sharply since March partly because they had fallen so far
in the year before that. For example, SL Green's shares closed at $39.59, up 53%
from the beginning of the year. But they're still well below their all-time high
of $156.10 hit on Feb. 7, 2007.
Victor Calanog, director of research at Reis, said the drop in rents will
likely spur a pickup in leasing activity over the next 12 months. Some large
companies may cut rents and offer lucrative tenant incentives to fill space, but
that could hurt their bottom line, he said. Calanog also noted that when job
growth resumes, the vacancy rates won't start to drop until six to 12 months
after that.
-By A.D. Pruitt, Dow Jones Newswires; 212-416-2197; angela.pruitt@dowjones.com
(END) Dow Jones Newswires
10-28-091123ET
Copyright (c) 2009 Dow Jones & Company, Inc.
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