With increasing vacant space in the marketplace, landlords have been looking toward improving their bottom line. One way of doing so is to attract smaller tenants who are leery of the costs and complications of moving in a down market. They are speculatively improving the space and marketing to tenants as pre-built, plug-and-play opportunities.
This approach succeeds at luring tenants into empty spaces. It is designed as a money-saver for landlords, who are able to control the budget for the work, rather than negotiating packages of tenant improvement allocations and free rent with prospective tenants.
With a lot of companies, the real estate decision maker already has a lot on their plate. And real estate is something that comes across their desk every five to seven years on average. Real estate isn’t their core competency, and they are looking for a quick and easy solution. Therefore, tenants coming into the market now don’t give themselves a year to 14 months as needed to get the process done. And by the time they do get a lease signed, they’re under the gun to get the construction done.
The tenants that are most drawn to pre-built office space are smaller companies, with space requirements of 12,000 square feet and under. In the past few quarters, these users have been shopping available spaces aggressively, but they’ve also put off pulling the trigger on real estate decisions until too late in the game.
For a tenant, a space that’s a shell or needs a complete retrofit, the construction typically scares them. They are looking to find something new, clean and efficient, something that makes a lot more sense for them. Generally, a short-term renewal is a very conservative play. When an easy decision presents itself, it becomes more appetizing to make that decision. People are looking for an easy solution, and if the solution is not easy, they’ll make a conservative play.
Plug & Play, Ease Of Moving
Plug and play also saves the landlord on tenant improvement dollars on the back end. These suites generally have a shelf life of more than 10 years, so if a tenant walks away from a space after five years, it is easy to spruce them up without much in the way of retro-fitting.
And so then the second time around the landlord doesn’t have to put any additional capital in, saving them money. Ease of moving is especially important in a down market, because the landlord typically sees a surge in leasing activity from tenants moving up in quality. Enabling the landlord the benefit of increased “lease-up” because if the tenant wants to be someplace in two months, the space is sitting there, ready for them.
This will also save the landlord money by also capitalizing on construction efficiencies by bidding several improvements as one project. There’s no efficiency to building out 5,000 square feet compared to 40,000 square feet, because you’re paying daily rates.
Do all these efficiencies benefit the tenant in lower rents? Not necessarily.
If a tenant decides to go it alone, they are up against the landlord who rents space over and over again, and has a lot of experience doing so. Giving the landlord a definite advantage. In most cases, they even hire a listing agent to help market the property and advise them.
Therefore, the real estate decision maker at the company, who has a lot on their plate, and only handles real estate every five to seven years, has an unfair advantage. Landlords use this opportunity to not negotiate free rents, improvements, parking, and a host of other concessions. The way for a tenant to balance this unfair advantage is by engaging the services of their own qualified tenant representative. Leveling the playing field.
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