EXTEND AND BLEND
Tenants Renew Leases Ahead of Expiration to Lock in Low Rates
By MATHEW PADILLA
Large tenants are taking advantage of the depressed office leasing market, exercising their clout to negotiate an early lease renewal,in some cases two years before maturity,at today’s lower market rates.
In fact, early renewals have become a valuable source of transaction volume for office leasing brokers, amid otherwise difficult times.
The renewals typically are tied into lease extensions of up to seven years, enabling landlords to lock in tenants and keep occupancy up, brokers said. At the same time, tenants enjoy price breaks now.
“It’s good for the landlord and for the tenant,” said Kurt Strasmann, Grubb & Ellis Co.’s managing director for Orange County.
It’s also good for the broker.
Strasmann said landlords are willing to deal with brokers on lease renewals: In tighter markets landlords go directly to tenants, keeping brokers out of the loop.
Brokers say lease renewal activity has provided a lot of deal volume amid an otherwise dismal office leasing market.
But renewal deals often are not publicized, or at least the terms of the deal are not released. In fact, brokers were reluctant to give examples for this story.
Brokers said they didn’t want to offend landlords who might be inundated with calls by tenants learning their landlord just gave a great renewal deal to someone else in their building.
Chris Deason, vice president with the Irvine office of Voit Commercial Brokerage, said renewal activity is occurring mostly among larger corporate tenants who can commit to seven-year lease extensions. These tenants often have an option to terminate their lease, he said.
Landlords are attempting to preempt early lease terminations, brokers said.
A couple of recent examples of renewals are Pfizer Inc. and Sprint Corp. In Pfizer’s case, the drug maker expanded at 18500 Von Karman Ave. (photos above), nearley tripling its size to 64,000 square feet.
If a major company wishes to expand, a landlord surely will accommodate it, brokers said, even if that means renegotiating at a lower market rate.
In the case of Sprint, the landlord,a venture between Cigna Corp. and Transwestern Investment Co.,agreed to renegotiate even though Sprint wanted less space. Brokers said it’s difficult to renegotiate if a company wants less space.
Sprint had about a year left on its lease when it began talks, according to Herb Hafter of the Newport Beach office of Jones Lang LaSalle Inc. Sprint ended up renewing for 56,638 square feet in a five-year deal.
In its heyday, Sprint leased nearly 100,000 square feet at 18200 Von Karman Ave.
Few Years Left
There are plenty of companies that signed five-year lease deals two or three years ago and have another two years or so on their contract, Voit’s Deason said.
These are the companies most likely to renegotiate, especially if they are larger, stable firms, he said.
“We are talking to a lot of people that have leases that are out to 2004, 2005, even 2006,” said Myron Galchutt, managing principal with the Irvine office of Newmark of Southern California Inc.
Brokers refer to renewal deals as “blend and extend.”
In a typical deal, a tenant with two years left on a lease renegotiates the lease now and the lower rent is blended into the new terms, which can extend out five more years for a total of seven, according to Royce Sharf, senior vice president with the Irvine office of Julien J. Studley Inc.
Julien Studley only represents tenants. Sharf said the “blend and extend” concept was practiced in the early ’90s, but disappeared when the market picked up.
The same thing happened to “free rent,” when a landlord gives a few months free rent to a new tenant to get a deal signed.
“In my opinion, any healthy company with a lease expiring in T-minus 24 months is a candidate for an early restructure negotiation,” Sharf said.
Sharf said that among landlords, real estate investment trusts are most likely to allow an early renewal, since they are focused on occupancy.
Private landlords are a mixed bag, with some doing early renewals and others prepared to wait and gamble, he said.
Newmark’s Galchutt said landlords that are doing early renewals include The Irvine Company and Equity Office Properties Trust.
In any case, the surge in lease renewal activity doesn’t signify that the office market is getting any stronger. It’s not, brokers say.
In fact, they aren’t even sure if rents have hit a floor yet.
Before the market can rebound, it must stabilize.
And for the market to stabilize, there must be a reduction in sublease space: Extensive sublease space has been putting downward pressure on rents, brokers said.
Sharf said there’s millions of square feet of sublease space on the market.
Still, he is optimistic. He said his clients are demonstrating confidence,a sign that better times are ahead.
