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Small tenants carry weight in NY office market.

Newmark has been closely tracking trends among small service companies, and the results have been startling. Surprisingly, 95 percent of New York's office tenants employee 20 people or less, and many small service companies are expanding and upgrading space at the end of their lease term.

In fact, the service sector has become a driving force in the current real estate market. This segment of New York industry remains vibrant and is generating a lot of activity in the current office market.

Unlike the last real estate cycle, when the high price of space forced many tenants to downgrade, there has been a "flight to quality" among many tenants, who are now able to upgrade from class B to class A space. As a result, new buildings and class A office space are doing well. Older buildings where the ownership has not made capital improvements to lobbies, windows and HVAC systems, etc. will suffer in this market.

During the past year, we've been hearing a lot about lease takeovers, but they are really the exception to the rule. When lease takeovers occur, tenants are usually taking significantly more space, and paying the entire cost of amortization. In order to do so, however, the tenant must be credit worthy, but in my experience, in the majority of "takeovers" tenants receive free rent in lieu of the prospective new building owner taking over the obligation.

Opportunities remain available in the sublease market, but they are only of real value if the tenant can utilize existing installations. For sublease terms of five to eight years, 30 percent to 40 percent discounts on current rates are often available, while short-term sub-leases (under five years) offer even heftier discounts.

Tenants are gravitating to buildings where ownership can demonstrate their financial capacity to do deals by performing tenant improvements and offering concessions of up to one month per year on 10-year lease terms. Smaller tenants (5,000 square feet of less) seem to prefer space that is "pre-built" or in "move-in" condition since many small companies lack the financial wherewithal and vision to work with raw space even when an "allowance" or "work-letter" is offered, and usually enter the market too close to their lease expiration to have the time to build.

Buildings that project an air of stable ownership are definitely faring better in the current market. Tenants respond best when the landlord's agent and attorney present a cohesive team that responds quickly to deal terms, issuing a lease and subsequent revisions on a very timely basis.

Speed is of the essence when dealing with any new tenant in today's market. Leases should be generated and responded to within 24 hour, and leases for small space with long, extraneous clauses are unnecessary and intimidating for small tenants.

In today's extremely competitive office market, there is no time for dawdling. There are two points I always emphasize to owners and developers - Carpe Diem (seize the day) and that time is a cancer! Owners must realize that with the plethora of space available it is critical to act before tenants can find another deal or find fault with yours.
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Title Annotation:Review and Forecast, Section I; New York, New York
Author:Cohen, William G.
Publication:Real Estate Weekly
Date:Jun 24, 1992
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