Not long ago, when potential tenants were seeking office space across the city, they were at the mercy of the landlord or owner.
“These are our lease rates, they’re firm,” landlords would say. “Take it or leave it, we have other prospects lined up.
“Oh and, if you’re interested in leasing this space, we’re going to need your last five years of financial history, you know, just to make sure you’ll be a reliable tenant.”
Those conversations changed during the recession, when vacancy rates were climbing and landlords were grasping for tenants. But as Charlotte moves back toward a landlord’s market, tenants aren’t relinquishing all the cards they’ve been handed.
Commercial real estate brokers around Charlotte said they have noticed a trend in the last several years in which their prospective tenants are demanding more transparency from building owners before signing any dotted lines.
Andrew Jenkins, president of Charlotte-based Real Data, a commercial real estate analytics firm, said the tables have turned a bit on landlords and owners when negotiating leases.
“It’s funny because it used to be the other way around,” Jenkins said. “Landlords were looking at tenants’ tax returns and seeing their leasing history.”
While it’s logical to assume that the tenant desire for additional transparency was borne of the recession, Jenkins said that’s not necessarily the case.
What’s happening is that five-year leases that were signed in 2007 or 2008 – before the depths of the recession – are running out today, Jenkins said. Some of those tenants likely won’t re-sign in the same building, potentially leaving vacant large tracts of space.
If a building that was previously fully- or near-fully leased were to lose a major tenant, the building’s owner would be losing a significant amount of rental income. And that loss of income could possibly hurt the building’s owner to the point where the building itself suffers.
Another scenario is that a building could be for sale and a tenant signs a lease before the sale occurs. The new owner could have a different objective with the building, or see the building as a less-than-important asset and neglect maintenance.
These are the kinds of things prospective tenants want to know, Jenkins said.
“There’s the issue of, what if the owner runs out of funds to pay for something, how are they going to give the amenities you paid for?” he said. “You wonder if they’re going to cut costs here or there.
“There have been issues of cutting power or security going away. Those are some of the issues tenants are concerned about, and obviously if you’re looking at new space you wonder if the landlord is going to be able to afford the upfit.”
And Jenkins isn’t alone in noticing that tenants are starting to become more – as he said it, “savvy.” Both Barry Fabyan and Bryan Howell mentioned this trend at a recent Charlotte “State of the Market” summit at the uptown Hilton.
Fabyan, senior vice president and manager of office leasing services with Charlotte-based Bissell, said that tenants recently have become very interested in the health of landlords and owners before they sign leases.
Bissell developed and owns the Woodward and Gragg buildings in Ballantyne, which were recently largely occupied when MetLife brought 1,300 jobs to the south Charlotte buildings.
Bryan Howell, managing director in the Charlotte office of Orlando, Fla.-based Parkway Properties, said at the breakfast that he’s also seen an increase in interest from potential tenants on landlord health.
Parkway owns and manages millions of square feet of office space across the city, including Hearst Tower, NASCAR Plaza and 525 North Tryon.
Anne Vulcano, senior vice president in the Charlotte office of CBRE, said that while tenants are demanding more than they did prior to the recession, they have been doing so for several years and are continuing to do so as the economy recovers.
“It started in 2008, and I would say that it might have been in reaction to some of the economic issues that landlords were having,” she said. “It was most prevalent in 2008 or 2009 and even into 2010.”
One building that struggled during the recession was NASCAR Plaza, Vulcano said. The building opened in 2009, but was foreclosed upon a year later. Since the foreclosure, NASCAR Plaza has had two different ownership groups – probably not what the original tenants had in mind when they signed leases.
Vulcano said, however, that the tenants at NASCAR never faced an amenity crisis and that now the building is stable and successful.
Still, tenants – and owners – remain uncertain of the financial qualifications of one another, Vulcano said, which is why tenants have become more demanding and owners are again demanding more from potential tenants.
“The landlord still wants to know the tenant is financially secure,” she said. “But now the tenant wants to make sure the landlord has the financial wherewithal to provide the amenities that are promised and provide the upfits.”