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Keeping tenants in a buyer's market.

In today's market, owners must remember that tenants are in the driver's seat. Tenants can almost write their own ticket in any building.

In order to retain existing tenants and attract new ones, owners must be realistic to survive in the current market. Despite slipping rental rates of up to a third, today's owner must offer greater workletter allowances and rental abatements of up to as much as two years on a 10-year lease; in many cases, the combination of construction, rental abatements and other incentives can mean discounts of anywhere from 20 percent to 30 percent on a long-term lease.

In order to take advantage of opportunities that exist in the current market, tenants are not only upgrading their space, but letting owners know they are ready and willing to relocate unless their terms are met. To ensure they do not miss out on the lowest rental rates in years, tenants are often investigating a relocation or lease renegotiation two to three years before lease expiration.

In many ways, today's market is reminiscent of the buyers market that existed from 1974 to 1976. Owners are offering aggressive deals to keep existing tenants who are paying above market rates because of escalation. Existing tenants can no longer be considered a "captive" audience. Today, they are receiving the same deals on lease renewals as new tenants. As an additional inducement to attract tenants, owners are willing to assume lease obligations.

We can probably not expect to see improvements in market conditions before next year. Factors that are contributing to the continuation of today's unstable atmosphere include a sense of uncertainty about the outcome of the upcoming presidential elections and an economic recovery that is much slower than anticipated.

In addition to current market conditions, the cost of doing business in New York is higher than any other city in the nation and spiraling upwards. The city's excessive real estate and occupancy taxes are driving tenants out of New York and increasing the allure of submarkets in Connecticut, New Jersey and Westchester.

To combat the exodus of business out of New York, the City has started offering tax breaks to major space users who are threatening to leave. A tax-break program should be created for all tenants.

At this point, it's difficult to expect companies to remain here, especially those seeking back office space. The federal and local government must ease the return on investment tax credits and capital gains taxes in order to make New York financially competitive and affordable for business.

Owners who expect to maintain occupancy levels through the current economic climate must be realistic. Those who realize supply exceeds demand and act accordingly can retain existing tenants and attract new ones until the market turns around.
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Copyright 1992, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:Review and Forecast, Section V
Author:Irlander, Sam
Publication:Real Estate Weekly
Date:Jun 24, 1992
Words:458
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