Sour Buildings Make Good Buildings Sweeter- February, 2011

In today’s office market in South Florida vacancy rates for most submarkets average 20% and over.  This is especially true in “C” Class Buildings or below.  Class “A” buildings are enjoying lower vacancies and less willingness by landlords to give excessive concessions to lure tenants.  Concessions can take several forms; free rent, free parking, generous tenant improvement allowances, moving allowances and the like.  Also there is less flexibility in the published rental rate and the actual effective rent finally agreed to by the landlord and tenant.

The classification of “B” buildings, plus or minus (B+ or B-) is often in the eyes of the beholder/owner/landlords/leasing agents.  Most landlords will want the newer buildings, less than ten years old, to remain in the “A” class category.  These landlords or lender/receivers want their properties to remain  Class “B” when they are by reason of financial condition, deferred maintenance, poor leasing and marketing efforts, are clearly about to fall into the dreaded “C” category.

The classification of “A”, “B” or “C” buildings should be determined by the age, location, leasing/marketing efforts by the leasing agent and maintenance of the property.  Because there is no industry wide criteria established, the classifications float, the “B” buildings tend to be the most flexible.  The plus (+) classification may include some buildings fallen from the “A” by reason of age and maintenance/condition.  The minus (-) classification in this category will include some properties that are clearly headed to become “C”.

In today’s recession period, several building have fallen into the “sour” category.  This is by reason of the negative factors set out above, they are about to fall into a lower category.  This is particularly true of “B” properties about to become “C” quality.  Many of these properties are “fractured” condominium offices which were good solid “B” building when they were leased.  After they were purchased at an inflated price by a condo converter, over financed by a unknowledgeable lender and failed after selling only a small fraction of the office units.  After foreclosure and judicial sale, tenants in these buildings are quick to recognize the changes in the maintenance, functioning of elevators/AC/ and poor marketing/leasing efforts by the owner.  Using the services of a tenant representative/broker, tenants can find out quickly what other properties in the submarket are offering.  They may discover they can improve their surroundings, lower their rent and gain the advantage of new quarters at an improved economic level.

“Sour” buildings tend to have this new designation spread faster through the market.  “Good” buildings and the office brokers representing tenants determine rapidly that new opportunities have presented themselves and they are quick to take advantage of the situation.  “Sour” buildings usually get worse before they get better, ultimately falling into the hands of a rogue buyer, who has purchased the building at a steep discount.  This buyer or his next in line can now afford to reposition the property and enter into a new leasing program which will ultimately create a healthy Net Operating Income (NOI) and a sale at a substantial gain the owner.

“Good” buildings usually get better and “Sour” buildings worse.  Office brokers know the territory.  If you are in a “Sour” building, hire a good office broker, he can negotiate good terms for you in a “Sweeter” building.  Remember the tenant representative is paid by the new landlord, so essentially you receive the services of this trusted, experienced and established professional at no cost to you or your company.

By:  Office Broker and Tenant Representative Steve Magenheimer -305-445-0916