Termination Options for Tenants

Termination options for tenants

Many tenants want early termination rights, to end their lease (or shrink their space) prior to the end of their natural lease term. There is always some cost associated with this; some payment is due from tenant to landlord, if the earlier termination (or reduction) is exercised. The stated rational of tenants asking for early termination rights is that they want to commit to a longer lease term and have the security of that longer term, but they need to have flexibility if their business turns bad or in a significant new direction, that requires less space or space in a different location.

However, owners that want to sell their buildings in today’s market are finding that the capital markets are spitting these provisions back out. Buyers do not want to consider or value this option for tenants in leases; they do not want an asset where they primary/anchor lease has such an early termination or reduction right, and buyers are backing away from deals, entirely, when these early terminations exist.

At some point, the rubber has to meet the road, on this topic. Landlords want (need) leases to provide an income stream, but not leases that will eliminate their chance to sell their building at an acceptable price. The ability of a tenant to get an early termination or reduction right in a lease, at a moderate buy-out price, has gotten much tougher in the last 6 months. The tenant had better really need the right and had better be ready to pay for it or to swap something else meaningful, for this right, because it has become a hotly contested point, as more landlords learn this hard lesson in the capital markets; no term – no sale.

Mark Elliott is a partner at Troutman Sanders LLP and contributed this post to the Atlanta Business Chronicle.

Atlanta Office Space rebound still on hold

New commercial real estate reports say office rental rates are at 2004 levels, after ticking up in the first quarter. That shows some stabilization, said Scott Amoson, director of research for Colliers, as the rate had been steadily declining.

But he and other experts believe landlords still have years to wait for major improvements in rates -- and demand to drive them -- because job growth remains lackluster in the region.

The average rental rate was $20.06 per square foot in metro Atlanta last quarter, according to data from real estate services firm Jones Lang LaSalle. Colliers reported a very small uptick to $19.22 per square foot. Real estate firms often have different numbers, based on what data they include.

The overall vacancy rate in metro Atlanta rose very slightly in the quarter to 22.5 percent, according to Jones Lang LaSalle, and to 18.3 percent according to Colliers.

Read More... about Atlanta Office Space

Atlanta's 3Q Office Market

The Atlanta Office market ended the third quarter 2010 with a vacancy rate of 21.5%. The vacancy rate was up over the previous quarter, with net negative absorption over 200,000 SF.

Though economists have indicated that the recession is over, the Atlanta market is expected to lag behind the rest of the U.S. in recovery. At 10.3%, unemployment in Georgia is higher than the national unemployment rate of 9.6%. Unemployment is expected to exceed 9% through the next two years.

The average quoted asking rental rate for available office space, all classes, was $18.88 per square foot per year at the end of the third quarter 2010 in the Atlanta market area. This represented a 2.6% decrease in quoted rental rates from the end of the second quarter 2010.

Evolution of Office Space

Historically, occupancy costs have always had a big effect on a company’s bottom line. Depending on how a company is structured, they are usually the second or third highest cost of operating a company, along with the workforce/personnel and IT. With the changes in the economy from the rapid growth in technology, to the recession, how has the environment of the workspace changed over the last few years? As businesses cut budgets, it has become more prevalent in almost every sector of the economy, that companies have made real estate decisions to help to reduce their expenditures. As someone who represents Tenants with their office leases, it has always been a part of my job to reduce my client’s occupancy costs. However, the role of advising clients with their office space has even more so today, developed into a consulting business. We are seeing before us, a changing corporate culture and a new generation of business owners and employees that have entered the market. Following are a few aspects of the workplace that affects the modern office of today -

A new generation: The traditional office has changed in ways that have scaled back the average square feet per employee. Not only are we seeing executives move from being in a large office, but they are moving into smaller offices and in some cases into a workstation with the rest of the employees. The company culture of collaboration has emerged as more conference rooms have become more relevant in the workplace. Co working has become more popular as have the concept of hoteling with telecommuting.

Technology: Technology has grown at an extremely rapid pace and has had an impact on the amount of space that is needed. The capability to eliminate record rooms or large server rooms has lead to digital record keeping and a data centers. Cloud computing has created an ease of access through remote sites by the internet, usually in the form of web based applications with customization by the end user.

Sustainability: Sustainability has come to the forefront of commercial real estate and is here to stay. In addition to being a good steward to the environment, the advantages of office buildings going green have financial gains over the long term for both Tenant and Landlord. Over time, this will help reduce the operating costs of the building, which is directly passed down to the tenant.

A workstation with a view

Workstations within the office space have become more of a common place in the work environment from the extreme with execuitves moving from offices to workstations, to workstations with the office view. Bill Coons of Office Interiors has laid out a good peice on daylight and productivity of a new and rising trend with the environment of the workplace.

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Not only from a cost measure, does the workstation factor into the office place, but so does employee and company moral. New and innovative work environments helps retention as well as recruitment.

Atlanta office space remains hard to fill

Atlanta's office vacancy has made it's way into the bottom third amongst US major cities with new buidlings and projects having come to market. As we are in the midst of a correction, landlords are looking for ways to cretively fill up the empty buildings.

Russell Grantham with the AJC provides good examples of projects and progress that some developers are doing to save some of what they have.

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At the Bottom for Atlanta Office Space?

The Office Market in Atlanta has been down nearing three years now and is there any end in sight? We are at a high with office vacancies since 2004 and buildings just delivered to the market. In my opinion, we'll be at the bottom until jobs start to come back. When we have a few consecutive quarters of job growth, that will be the time that we'll start seeing positive absorbtion.

A good article written by Jim Jordan with Sutherland, Asbill & Brennan LLP, in the Atlanta Business Chronicles addresses the situation and provides some good insight on "When will Atlanta's Office Market Hit Bottom?"