Mark McGranahan: The Importance of Landlords’ Debt Status in Attracting Office Tenants
The U.S. office market has been experiencing a period of uncertainty in recent years, with the focus shifting towards attracting and retaining occupiers. While it is commonly believed that newer spaces with high-end amenities are the key to success, Avison Young’s Principal – Landlord Representation, Office Leasing, Occupier Services Mark McGranahan suggests that tenants are now placing more emphasis on landlords’ debt status.
According to an article by Avison Young , companies are increasingly scrutinizing landlords’ capital stacks and putting debt status at the top of their list when requesting proposals. “Regardless of a building’s ‘class,’ tenants want assurance that their landlord will be able to perform,” says McGranahan.
He explains that many newer buildings have higher rents due to their high debt structures but they also attract new tenants. However, it remains uncertain how these buildings will fare in five or ten years after weathering any potential financial storms.
The Challenge for Newer Class A Properties
While these newer properties may offer attractive amenities such as rock-climbing walls and virtual yoga studios, some may struggle under heavy loans which exceed the current value of the building. As a result, overleveraged owners often require tenant improvement (TI) funds as collateral before leasing out space.
However,TIs hold significant importance for many companies – especially those in financial services or law – who prefer customized spaces costing $150-$250 per square foot . If they cannot find suitable options among new construction projects within this budget range , they might choose not move at all or opt for older properties instead .
McGranahan adds that occupants pay premium rates expecting consistent maintenance throughout their lease term; however if highly leveraged buildings end up back with lenders,the quality standards set by developers might not be maintained .
Class B Buildings May Not Be The Answer Either
McGranahan warns that concerns about overleverage do not necessarily mean a sudden surge in demand for Class B buildings. The type of tenant plays a crucial role, as he explains: “Budget tenants always look for lower rates while most others seek better ‘experiences’ post-COVID to encourage employees back into the office.”
Regardless of whether occupants prioritize lower lease rates, guaranteed TIs or attractive amenities – it all boils down to one thing: “Tenants want assurance that their landlord can perform,” says McGranahan.
The Bottom Line
In conclusion,the article emphasizes the importance of considering employee preferences when choosing an office space and how this may differ from what makes headlines. Meanwhile, building owners should take proactive steps to reassure potential and current occupiers by highlighting their financial stability.
As McGranahan advises:”Well-capitalized owners should be transparent about their financial status with prospects.”
