By Ken Ashley, Executive Director, Office Tenant Representation
While office leasing activity in Atlanta remains strong, the pressure landlords feel to get space leased could allow an old friend to creep back in select submarkets – free rent.
Savvy companies can use the high expectations that building owners have placed on themselves to obtain more free rent and better deals. Understanding how the other side thinks and the stresses their day job offers is a time-tested way to structure a better deal. A “help me help you” attitude can go a long way.
In lease negotiations, there are four basic economic levers that can be negotiated – rental rate, tenant improvement (TI), escalation and free rent. Landlords commonly don’t want to budge on rate or escalation, because it hurts their building’s value. TI dollars can result in a space that’s highly specialized and potentially hard to lease in the future. Also, TI is risky because it can be a sunken cost if the tenant’s business fails.
However, one way to accomplish a tenant’s economic goals is for landlords to “take their medicine” at the beginning of a deal. In a true life version of win/win, the landlord hands out free rent but still maintains relatively high rental rates called for in their underwriting. Then the tenant’s CFO simply “straight lines” free rent, so that brings down the cost of rent on the tenant’s side of the ledger. Voila; the landlord protects his building value, and the tenant gets a lower effective rental rate after the accounting treatment.
One submarket in Atlanta where more free rent is an increasing possibility is Buckhead, which had a 12.2 percent vacancy rate in the first quarter and overall average asking rents of $32.19 psf. Additionally, markets like Cumberland Galleria and Central Perimeter that experienced significant move-outs in the first quarter are primed for free rent. Atlanta experienced negative net absorption in the first quarter for the first time since 2011, which indicates the market could be softening.
It remains a tough market for tenants, but for once, using the F word with your CFO might elicit a smile.