Tucson's Soft Commercial Real Estate Market Offers Tenants Several Options To Save On Occupancy Costs

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Still reeling from the tech downturn and subsequent economic recession, Tucson's corporate real estate market continues to experience declining rental rates and increasing vacancy. Like markets all across the country, Tucson is experiencing high vacancy rates of more than 10 percent in retail, office, and industrial spaces. Building owners are pressured to strike deals because of competition for tenants and their own mortgage refinancing issues. Clearly, these market conditions have opened up numerous options for credit worthy corporate space users to negotiate rates and terms that deliver significant saving off overall occupancy costs.

For those corporate tenants in the market for new space, opportunities abound to capitalize on lower rates and increased concessions such as free rent, increased tenant-improvement allowances, reduced security deposits, and in some cases even cancellation or contraction/expansion options. With sublease space still flooding the market, not only is the excess space putting competitive pressure on direct -space landlords but also providing space seeking tenants with additional options . Eager, sometimes desperate, to reduce their surplus space liabilities, many sublessors are offering dramatically lower than market rates and numerous concessions.

But what if you are not is such an opportunistic position? What if you currently have more space than you need? Or what if your lease doesn't expire for another eighteen months or more, and you are presently paying greater than market value? As a result of severely declining rental rates, it is not unheard of for companies to be locked into existing leases with terms several dollars above market rates.

Well believe it or not - you still have options. Even when your lease is years away from expiration, early renewal and lease restructure can be a viable cost-savings vehicles. Most proactive landlords have paid attention to the market trends and decided that it is much more cost effective for them to retain tenants - even at a reduced rate and/or reduced square footage - than run the risk of carrying liability of vacant space. As a result, proactive landlords are coming back to the bargaining table to entertain renewals and restructures on leases as far out as two to three years. This equates to a win-win for both landlords eager to extend current occupancy and tenants who have the opportunity to realize substantial immediate and long-term savings.

There's no doubt that reducing overall occupancy costs is a major benefit for any corporate tenant; however for public companies, the benefit is magnified as the positive impact on the income statement also impacts earnings per share. If your company is considering a merger or trying to raise equity, reducing occupancy costs and delivering bottom line savings would definitely prove beneficial in reaching your economic targets. For instance if a company's value is based on seven times earnings and it is able to reduce its occupancy costs by $100,000 per year, the savings could translate into an additional $700,000 of value.

Of course it is not wise to take advantage of the opportunities until you are armed with a strategic real estate plan that corresponds directly with your business plan. Although market dynamics have created an "upper-hand" environment for credit worthy space users , being able to accurately plan ahead for the next three to five years is crucial.

Without a clear idea of future space needs, committing to a new and/or longer lease -despite cost or size reduction - is extremely risky. Where is the benefit of locking into a lower-cost five-year lease only to discover that you didn't need half of the space two years from now? Conversely, what if you negotiated a space reduction in an extended five year term and realize you actually needed that space two years later? In both cases , chances are that the cost if adjusting your real estate to match your future, unanticipated space needs would negate any cost savings realized now. Remember, even in the most opportunistic circumstances, uncertainty can prove costly. Employing the services of a tenant-representation expert to ensure effective strategic planning is essential to making sound real estate decisions.

With more than 22 years of experience in commercial real estate, Michael Coretz is a principal in ITRA/ Commercial Real Estate Group of Tucson, LLC a leading regional, national and international corporate real estate advisory firm exclusively serving the needs of corporate space users. For more information call 520-299-3400 or visit http://www.cretucson.com .

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