When High Vacancy Rates Persist Even As The Economy Recovers
Speaking in national terms, employment growth is tepid, and the pace of economic recovery is not what anybody would consider ideal. These trends apply unevenly across regions and markets, meaning that in some places, recovery is presenting a “new normal” of economic growth that nonetheless includes a commercial property hallmark of economic recession: high vacancy rates.
The disconnect between national trends and some local realities is easily found: national declines in vacancy for office, retail, industrial and apartments are loudly touted but not as prominent are reports (taking southwestern Florida only as a handy example — apologies to any Gators) of office vacancy rates mired in the high-mid teens.
Jim Garinger, CCIM, SIOR, and Managing Director of Colliers International SW Florida has thought through what these challenges mean to landlords and tenants. Jim sees employers reducing space outlay per employee — a observation no doubt supported by the explosion in telecommuting and shared-workspace employment expectations of the internet-enabled millennial generation that we’ve written about here plenty of times. In Jim’s article “Commercial Connections: Companies Are Downsizing For Higher Quality, Lower Cost”, he spells out ways the vacancy realities can and should affect the negotiations over commercial occupancy.
Historically, office occupancy rates have a positive correlation with office sales and leasing activity, but in this economic recovery there’s a twist. After companies have been able to keep their heads above water and generate profits, they are either looking at smaller spaces that are a higher quality, or at smaller spaces to cut overhead costs.
Either situation has companies “increasingly packing more employees into less space, a trend that is helping cause U.S. vacancy rates to linger at high levels even as employers add jobs in the slowly expanding economy,” said the Wall Street Journal in a recent article.
These factors present a unique situation for tenants seeking space, with a significantly lower amount of Class A office space available in Southwest Florida compared to B and C. According to the CoStar Southwest Florida Office Market Report for 2011, of the existing vacant space, 16 percent is Class A, 64 percent is B and 20 percent is C. The national vacancy average reflects the same trend, with 35 percent being Class A space, 49 percent Class B and 16 percent Class C.
[Landlords should] avoid losing a potential tenant by making an offer to build out dead space if you need to. With companies downsizing not only in amount of employees, but the amount of space each employee gets, consider being flexible with the space. For example, consider building out a space to create two spaces rather than keeping one large area that would only appeal to a large company.
[Tenants should] think creatively and don’t be scared off by unusual spaces that have potential to be used for a different purpose. These landlords are often struggling with finding a tenant or a solution to their space, and will offer an attractive rate for someone willing to reconfigure the space for their needs. For example, Fort Myers Preparatory and Fitness Academy recently leased a former Robb & Stucky warehouse, and while the 65,000-square-foot building required a renovation to create 33 classrooms and a cafeteria, the Landlord was able to recycle and sell a significant amount of shelving which offset some costs.