Local office leases get creative

The art of the deal made a big comeback last year in the Toledo-area office market, with potential tenants calling the shots and landlords agreeing to creative leases lest their properties sit idle, local commercial real estate professionals said.

In past years, landlords could dictate high lease rates but would offer tenants short-term incentives such as cash to remodel the space to the tenant's liking. Now, companies needing additional or new space are coming to a deal with lots of cash.

"So you get a major corporation saying, ‘Rather than doing this deal at $22.60 a square foot, we'll do it at $16.50 and do our own improvements,'?" said Mike Poulos, senior vice president of CBRE Reichle/Klein in Toledo.

And often the tenant will demand a long-term lease at the lower rate with the landlord either agreeing or facing a vacancy and no income from his property.

More often than not, landlords in the last year acquiesced to the terms favoring the tenant.

"It's a bizarre balance, but it's balance. It's a new balance," said Mr. Poulos, an office market specialist.

Bob Mack, a principal who specializes in the office market at the Toledo office of Signature Associates Inc., agreed that far more creative deals occurred than in previous years. "Creativity is becoming the norm," he said.

"You have landlords in this economy that, more than ever, don't want their space to be empty because when it's empty, it's costing them money. They still have overhead, taxes, operating expenses, and this is an economic climate where you don't have to get the very last dollar of revenues, but you certainly have to control your outlays," Mr. Mack said.

The result, the experts said, is that office space is being snapped up and leasing rates are dropping, although not drastically.

"I don't think there are too many landlords out there saying, ‘We're just going to ride out the storm.' I think those days are over," Mr. Mack said.

According to a recent year-end market overview of office and retail space in metro Toledo by CBRE Reichle/Klein, the vacancy rate in the office market at the end of 2011 dropped to 16.9 percent from 17 percent at the end of 2010.

Leasing rates fell to $15.09 per square foot at the end of 2011 from $15.43 at the end of 2010 — the fifth consecutive reporting period in which rental rates declined, the Reichle/Klein report said. The company reports on the commercial real estate market every six months.

CBRE Reichle/Klein said a lack of credit to obtain funds used to provide building improvements for tenants was having the biggest impact for landlords. "It has had the effect of exaggerating the decline in asking rents …" and forcing more landlords to offer space "as is," the report said.

Meanwhile, tenants are taking advantage of the situation, and that has produced a lot of renting activity and caused more potential tenants in the Toledo suburbs to look at moving into vacant space downtown, Mr. Poulos said.

"We're getting more people to consider downtown. In the past, downtown was always more expensive than the suburbs, but that situation has flipped," he said.

Office vacancy rates in the central business district were at 21.3 percent at the end of 2011, up from 21 percent at the end of 2010. In the suburban office market, the vacancy rate was 14 percent at the end of 2011, down from 15 percent a year earlier.

The average lease rate for the central business district was $14.35 per square foot for 2011, up from $14.11. In the suburban office market, the average lease rate was $15.99 in 2011, down from 16.77, according to the Reichle/Klein report.

Helping the vacancy rate was the near absence of new construction in the office market. The report said only two small office buildings, both in Sylvania, were under construction at the end of 2011. Both were build-to-suit projects that were likely to result only in a small surplus of space being added to the office market.

In a companion report on the Toledo retail market, CBRE Reichle/Klein said the vacancy rate for retail space in metro Toledo fell to 14.7 percent at the end of 2011 from 15 percent a year earlier. Rental rates for retail space dropped to $8.34 per square foot at year's end from $8.39 at the end of 2010.

The vacancy rate has been declining since 2010, the report said, with nearly 160,000 square feet of retail space rented in 2011.

In the local retail market segments, the vacancy rate of East Toledo/Oregon rose to 12.7 percent at the end of 2011 from 12.3 percent, the central business district fell to 20.5 percent from 20.6 percent, Perrysburg/Northwood fell to 15.5 percent from 17 percent, the South/Southwest area fell to 11.9 percent from 14 percent, and West Toledo/Sylvania stayed at 14 percent.

New retail construction remained at modest levels, the report said, with only one project of note under construction — the University of Toledo Gateway project, a large-scale mixed-use development with multitenant retail, including a Barnes & Noble store, and housing.

Contact Jon Chavez at: jchavez@theblade.com or 419-724-6128.