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Tuesday, Aug 16, 2022
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Deals Up Amid Concessions

Landlords are finally getting the message that they need to act creatively and are agreeing to generous concessions in order to fill their vacant commercial spaces, according to brokers who are now reporting an increase in transactions. Many are negotiating deals that would have been almost unthinkable two years ago. “This time last year there was very little activity whatsoever, the amount of transactions was almost non existent so the landlords needed to do something to entice those business that were contemplating either relocating, renegotiating their leases or expanding, so this is what they’ve done and as a result we’ve had more activity this year than we had all of last year,” said Grant Harris, a principal with commercial real estate firm Lee & Associates- LA North/Ventura, Inc. Concessions such as free rent, reduced rent for the first years of the lease and greater tenant improvement allowances have become standard in lease negotiations and a critical tool for landlords. Such concessions were critical in securing a tenant for a 98,000 square foot building in Camarillo, said Harris who represented the landlord in the transaction. Given the Ventura County vacancy rate of 4.8 percent on a direct basis, and the fact that the number of tenants looking for that size of space is very few in that market (the same property owner has another 110,000 square foot building in Camarillo that’s been on the market for 7 years) when an opportunity came up the landlord did not want to lose it, Harris said. The tenant, Dynacorn International Inc. a distributor of parts for classic cars and muscle cars, was seeking to consolidate its operations in Oxnard into a single building and had a number of choices in Ventura County. In order to entice Dynacorn, the landlord was willing to significantly reduce the rent for the first couple of years and also delayed the start date for the lease by more than six months giving Dynacorn the option of an early occupancy, Harris said. While Dynacorn’s lease officially begins in January of 2011, the company is expected to begin moving in within the next two months. “We had an asking lease rate of about 55 cents per square foot triple net and what we ended up doing is reducing that first year rent down to about 42 cents a square foot and then the second year was 43 cents, the third year was 45 cents, the fourth year was 46 cents, the fifth year was 48 cents, the sixth year was 49 cents and the seventh year was 51 cents,” Harris said. “We wanted to make Dynacorn a very enticing offer, but at the same time, this was a very smart move for the landlord. This transaction provides our client with a great tenant on a long term basis, and the opportunity to return to market rate lease rates when the economy improves. It’s a win-win for all concerned.” The lease, with a total consideration of nearly $4 million, is one of the largest signed in Ventura County this year. “Landlords are finally getting the message, if they want to participate in this marketplace, albeit a downturn market, then they are going to have to get aggressive with their lease rates and concessions,” said Lee & Associates broker John Ochoa. Ochoa also worked to restructure the lease agreement of a green energy startup in Camarillo so that their rent was reduced for the next two years and created a schedule of staggered increases to bring them back to market rents over the remaining lease term. Office lease renewals Ochoa also recently renegotiated a lease with a tenant that was occupying about 25 percent of a building and managed to reduce their rent by 25-30 percent. “The landlord certainly didn’t want to lose them because they already had over 40 percent vacancy, so that’s not uncommon,” he said. “If you have a lease that you signed three to five years ago and you’re up for renewal you’re seeing, in this particular marketplace, rate reductions of at least that.” According to Roger Beck, a broker with Grubb & Ellis, all types of concessions, including increases in tenant improvement allowances, are becoming more and more commonplace. “We’re seeing tenant improvement allowances of $40-$50 a square foot when 24 months ago they wouldn’t have been more that $20,” he said. Beck who has negotiated lease agreements with free rent and reduced rents for several clients, has also seen agreements where the landlord agrees to make existing furniture available to a tenant. In what has increasingly become a tenant’s market, Beck said they’ve even seen tenants ask for relocation allowances, however no landlord he knows of has agreed to that yet. Unique opportunities In the current office market in the Greater San Fernando Valley, where office vacancies can reach upwards of 20 percent depending on the region, landlords are now offering tenants an opportunity to gain equity on a property in exchange for a lease agreement. “This is one of the more unique opportunities that we’re seeing right now,” said Jeff Albee, senior vice president at Colliers International. “What is called the synthetic lease is making a comeback because of the conditions of the market,” he said. In Woodland Hills alone, Albee is representing the landlords of three office/flex properties, where they are willing to give the tenant equity on the property for no cost other than making the monthly lease payments. The properties located at 6160 Variel Avenue, 21050 Erwin Avenue and 22151 Ventura Boulevard, have each been vacant for more than a year and Albee is confident this additional enticement will be effective at attracting tenants. “One way to look at it is that the tenant can take their concession when they retire, as they will be making a profit on the real estate investment they are making,” said Albee. The trend of landlords willing to give equity in their property is quickly growing, he said. “It took a while for landlords to realize, and now that we’ve all woken up from a state of shock, creative deals are going down,” he said. Enticing brokers In the current market, landlords are not only enticing tenants but are also looking to get an edge by offering broker bonuses. “Where a typical tenant rep would come in and ask for a four percent fee, now they may also get a cash bonus allowance or a credit card voucher, or a vacation voucher,” said Harris from Lee & Associates. “Landlords are enticing everybody.” Landlords realize there are a number of different buildings out there with similar amenities and are trying to get their property on the broker’s radar screen, said Harris. It’s one more way to bring attention to their properties. “If you’re a good broker you’re showing your client everything anyway but they’re thinking that if you’ve got two or four buildings basically with the same amenities and you know one landlord is going to offer you more, that the broker may work a little bit harder to get that transaction done at that particular building,” he said.

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