Mark McGranahan: The Key to Attracting Office Tenants? Less Debt
In recent years, the U.S. office market has been in a state of flux, with much focus on how to attract and retain occupiers. While it may seem that newer spaces with high-end amenities are the way to go, according to an Avison Young article , many companies actually prefer landlords with less debt.
According to Mark McGranahan, Principal – Landlord Representation at Avison Young’s Office Leasing and Occupier Services divisions and co-author of the article, tenants are increasingly scrutinizing landlords’ capital stacks when considering potential office space. This means that regardless of a building’s “class,” tenants want reassurance that their landlord will be able perform on their obligations.
McGranahan points out that while newer buildings may initially attract new tenants due to their high-end amenities and modern design features, they often require higher rents in order for owners to service higher debt structures. As such buildings age over time or face financial challenges due being overleveraged by owners who took out loans larger than the building’s current value could support (a common practice during times of low interest rates), there is no guarantee they will continue maintaining these attractive features or provide necessary tenant improvements (TIs).
This can be problematic for certain types of occupiers like those in financial services or law firms who often have specific customization needs for their spaces which can cost $150-$250 per square foot. If these companies cannot find suitable options among new construction properties within this budget range they may opt instead stay put or even move into older properties.
While some might assume this would lead more occupiers towards Class B buildings as a solution; however according McGranahan it really depends on what type tenant you’re talking about – budget-conscious ones looking only at lease rate vs those seeking better overall experience post-COVID-19 pandemic including things like attractive amenities to entice employees back into the office.
Regardless of what a tenant is looking for in terms of lease rate, TIs or amenities, one thing remains consistent: they want reassurance that their landlord will be able to perform. This means it’s crucial for building owners to ensure they are well-capitalized and can meet their obligations when it comes to maintaining the space and providing necessary improvements.
In conclusion, while flashy headlines may grab attention in the commercial real estate world, ultimately what matters most is finding a property that meets your specific needs as an occupier – even if it doesn’t make front-page news. And with interest rates on the rise and asset values decreasing due to COVID-19 pandemic impacts; both tenants and landlords should take steps towards vetting each other’s financial stability before entering into any agreements.
