Landlords and Tenants Alike More In Favor of Short-Term Leases

From the NYT. Pretty similar to what is going on locally. Link to full article below.

Both tenants and landlords seem to be growing afraid of commitment these days. With the economic outlook murky at best, fewer of them want to tie themselves to long leases.

Tina Fineberg for The New York Times

In Manhattan, where office leases often last 10 years, there has been a noticeable uptick recently of leases lasting only one to three years. Some prominent landlords have begun playing up the availability of short-term leases in their buildings.

For example, Paramount Group is advertising two-year leases at 1633 Broadway, between 50th and 51st Streets. And the Kushner Companies sent promotional materials to brokers advertising one- and two-year leases for finished offices in 666 Fifth Avenue, a prime office tower that spans the entire blockfront of Fifth Avenue between 52nd and 53rd Streets.

In all of Manhattan, 21 percent of the office leases that were signed in the fourth quarter of 2008 were for three years or less, compared with 15 percent in the corresponding quarter a year earlier, according to Cushman & Wakefield, a real estate brokerage firm that compiles data on commercial transactions. Brokers say they expect short-term leases to become even more fashionable this year.

“There’s a lot of anxiety out there, and short-term decisions are easier to rationalize,” said David L. Hoffman Jr., a principal at Colliers ABR, a real estate services company.

Mr. Hoffman is the leasing agent for some office towers in Manhattan whose landlords have recently signed short-term renewals with existing tenants. “There were tenants with one foot out the door, who were leaving spaces that required large capital improvements,” Mr. Hoffman said. “We decided it was more cost-effective to keep them in place.”

In recent months, he has negotiated five short-term lease renewals at 360 Lexington Avenue, a 24-story, 262,000-square-foot office tower on the northwest corner of 40th Street. Three of these renewals were for two years, and two were for one year.

Brokers say that smaller tenants tend to favor short-term leases now, while large office tenants still prefer the stability of long-term leases. For example, the short-term leases that Mr. Hoffman negotiated at 360 Lexington Avenue ranged in size from 2,500 square feet to 7,300 square feet. The tenants included a law firm, a technology firm, a small financial firm and two missions to the United Nations, which is nearby.

The building is owned by AEW Capital Management, a real estate company based in Boston, which bought it for $129 million in August. “We did not forecast higher rents when we bought the building, because the Bear Stearns building was nearby, and we knew there would be a shakeout in the financial sector,” said Jeff Furber, the chief executive of AEW Capital Management, which is a subsidiary of Natixis Global Asset Management, a French investment firm. Indeed, he said, “we liked the building because it didn’t have a lot of financial firms in it.”

Mr. Furber said that tenants were driving the demand for short-term contracts and that he would be happy to sign office leases for five years or more. “But business conditions are deteriorating so rapidly,” Mr. Furber said. “Tenants are saying that they’re just not sure how much space they’ll need in a year or two, so it is hard for them to commit.”

Matthew Astrachan, an executive vice president at Cushman & Wakefield, who represents both office tenants and landlords, said that the Manhattan office market had recently become a “tenants’ market,” meaning tenants now have the upper hand in negotiations with landlords.

The vacancy rate for the entire Manhattan office market as of the end of February had risen above 9 percent. But vacancy rates are even higher in the most expensive top-notch buildings, known in the industry’s jargon as Class A office space. The vacancy rate for Class A buildings in Midtown Manhattan has climbed to 10.6 percent, according to Cushman & Wakefield.

Mr. Astrachan said that in times like these, tenants can often negotiate with landlords for concessions — like long periods of free rent and capital improvement allowances — if they are signing 5- to 10-year leases.

But tenants signing leases of one or two years cannot negotiate as many perks. “They are slightly overpaying, in order to keep their flexibility,” he said.

Charlie Malet, the executive vice president in charge of national leasing for Shorenstein, a real estate company based in San Francisco, which owns several office buildings in Manhattan, said that short-term leases were attractive for both landlords and tenants now.

“Landlords don’t want to tie up space for what they perceive to be a low rent,” he said. “And if the tenants are a little uncertain about the long-term business environment, they don’t want to lock themselves into a 10-year deal.”

Mr. Malet said that Shorenstein recently signed a one-year lease renewal with Harbor View Advisors, an investment advisory firm, at 850 Third Avenue. Shorenstein bought this 39-story, 1.2 million-square-foot office tower last summer. The price tag was around $325 million, according to Real Capital Analytics, a New York research firm that tracks sales of office buildings.

Ken Perry, the chief investment officer and director of asset management for the Swig Company, a real estate concern in San Francisco, said the company had recently signed about half a dozen short-term leases at 1411 Broadway, one of several office towers it owns in Manhattan. Swig has had a 50 percent stake in this building since it was built in 1970, and is currently a co-owner with the Blackstone Group.

“This is the first time that I can remember when both landlords and tenants want to do short-term leases,” Mr. Perry said.

He said that usually one side or the other saw an advantage in this approach, depending on which direction rents were thought to be heading. “But with all of this uncertainty in the markets, neither side wants to go long term.”

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