In 2019 commercial businesses in the Charlotte area and beyond that have leases that are up for renewal have noticed a lack of available alternative space options in the market, and that Landlord’s are asking for, and receiving large rental rate increases. This is a classic case of a Landlord’s market.
The question Tenants should be asking is how did we get to this point? In 2008 when the economy went into a recession, and the global financial markets froze, construction of new commercial space largely ground to a halt. Businesses chose to downsize and cut back their spending including the amount of square footage that they were leasing. As vacant space came back on the market Tenants with viable businesses suddenly had plenty of options to choose from, and Landlords began “blocking and tackling” as they tried to block any existing Tenant from leaving, and tackle any new Tenant that came by to look at their space. 2009, 2010, 2011, & 2012 were Tenant’s markets from a commercial real estate standpoint, and in hindsight it was a great time to lock in a long-term lease.
As the great Warren Buffet said “when others are fearful be greedy, and when others are greedy be fearful.” For most Tenants it was a tough time to be greedy with a fearful Landlord and lock in a long term deal due to the uncertainty they had in their own businesses so most Tenants rode the market down with short term leases and have been riding the market back up with short term leases. The downside of the short term lease approach in a Landlord’s market is that each time the Tenant comes back to the negotiating table the Landlord’s position has strengthened, and rental rates continue to rise and lease concessions like free rent and Tenant Improvement dollars begin to disappear.
At the same time general contractors where feeling the effects of the slow down in the construction industry as they were at times pricing work at cost just to keep their crews employed in order to stay in business for the future when the market turned positive.
As the market has improved over the last several years the space that was available was quickly absorbed. As Landlord’s gained more confidence in the economy and the demand for space they began developing new properties to meet the demand. As Landlords began to develop new space commodity prices for steel and other materials that are critical to commercial real estate development began to rise. The stronger economy and the increased employment opportunities that came with it also caused wages to increase in the construction industry, and a “war for talent” as contractors fought to retain their best employees.
A combination of a strong economy, a lack of available space, rising raw material prices, and rising construction wages have all come together to create rental rates that are rising at a much higher rate than the market standard of 3%.
The question is what should Tenants do to position themselves in a Landlord’s market. That is a question we will answer on the next post.