Build it, and they will come: the key to attracting new tenants.
Yet, there is one criterion that tenants in this market nearly all have in common, they either want space that is already built or they are looking for the landlord to build out their new space for them.
As exclusive leasing and managing agents for over two dozen buildings in Manhattan, Adams & Co. receives hundreds of inquiries regarding availabilities each month. Almost all are asking for built space, and have no interest once the word raw is mentioned.
Tenants have never wanted to assume the headache of overseeing a construction process, with its elusive budget and schedule targets. At the end of 2003, the quantities of vacant space in the market and the limited velocity of deal making have given tenants as much leverage as ever in transferring that responsibility to the shoulders of others.
The current market data Adams & Co. has evaluated show general vacancy and availability rates up slightly, negative absorption of vacant space, and rents that continue to slowly drop.
Market data is valuable in providing a general picture of conditions and tenants' relative leverage over landlords. Of course, these data--which combine neighborhoods, building classes and managing/ leasing agents into the same average numbers--can obscure the real picture as much as reveal it. Adams & Co., for example, has continued to perform well. Our tenant representation teams close deal after deal for their clients. Meanwhile, the buildings that we lease and manage--with just a few exceptions--have 95-100 percent occupancy rates, which, in effect means zero percent vacancy.
Other numbers help highlight the good position of tenants seeking built space. Sublease space accounts for about one-third of the availabilities. Since these spaces have often already been built out, businesses looking for built space have a significant pool from which to choose. Space prebuilt by landlords adds in quantity to that pool. Space which landlords are willing to build-to-suit increases it even further.
The conclusion that most tenants are drawing is that, if they don't want to build out their new space, they don't have to. Even some of the most conservative landlords, those who in the past were the least willing to sink money into building out space on spec, have started doing so. Raw space now lingers on the market for months longer than built space, if it is leased at all.
Adams & Co. has a tradition of prebuilding space, for showrooms in particular. This strategy, at buildings like 231 West 39th Street and 10 West 33rd Street, has been incredibly successful and helps account for our portfolio's impressive occupancy rates. In those buildings, we have even had to turn prospective tenants away at times.
Right now, Adams & Co. is offering built space at 11 East 26th Street, including about 15,000 square feet targeted at giftware showroom tenants and about 18,000 square feet targeted at office tenants.
This building is one of the few in our portfolio with more than a few percentage points of availability and it shows very well when built out, in part due to the excellent views of Madison Square Park.
Prebuilding space allows the landlord to do a higher quality build out, with the expectation that it last 10 or 15 years. When we build a space, we expect to be able to utilize that investment for many years to come, with periodic refreshing of only the paint and carpet. Like most landlords, we seldom if ever prebuild spaces larger than 6,000 square feet. Build-to-suits are more common for larger space, such as the offices we are building out for two law firms at 411 Fifth Avenue and 102 West 38th Street.
The willingness of landlords like Adams & Co. to invest in prebuilding space is one element of a strategic approach to managing portfolios. Another element is investing in infrastructure such as new windows, terrific new lobbies, new restrooms, elevators, telecommunications and air conditioners.
A full 80 percent of the elevators in Adams & Co. buildings are new, and we have remodeled most of our lobbies throughout the portfolio over the last 48 months.
We began making these investments while anticipating the unfavorable market data that now sits in the in-box of every New York real estate executive. In a marketplace that strongly favors the tenant, leasing agents are fighting not just for higher rents than their competitors, but to lease their space at all.
Under these conditions, well maintained and modernized buildings are most successful.
Adams & Co. is doing well in this market because we are operating on its terms.
Tenants want to focus on their own businesses and occupy turnkey space rather than manage a difficult process of construction in a sub par building.
With our prebuilt space, our willingness to build to suit and our renovated properties, we give them that luxury.
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|Publication:||Real Estate Weekly|
|Date:||Nov 26, 2003|
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