One of the most overlooked areas for cost reduction is the status of companies' office leases within a real estate cycle. They work hard at negotiating the best possible economics when it comes time to negotiate a new lease--yet they don't have a firm grasp on whether their company is positioned to take advantage of a soft real estate cycle or fall prey to a firming market and rising rental rates. On the other hand, companies armed with a keen understanding of the current cycle, and its cause-and-effect relationship, have been quietly examining the feasibility of recasting their current leases.
In many office markets across the U.S., the pendulum has already begun to swing back to the landlord. Premium projects in several markets have now reached 95 percent occupancy. Rents in the more desirable submarkets within a given metropolitan area are beginning to firm. Selection of top alternatives has quietly thinned--perhaps much more than most people realize, given the typical lag in real estate reporting. These factors are often the precursor of a significant change in the market.
A closer look at the cyclical history provides an eye-opening illustration of what the next few years will look like. Reis Inc. (www.reis.com) a leading provider of real estate research and forecasting information, tracks rental rate changes and forecasts rental rate growth. Led by a team of Ph.D. economists, Reis developed an econometric model that analyzes job growth, employment patterns, office trends and the supply of new construction projects being planned and/or built. Reis then gauges the impact of these variables and the effect on market fundamentals to formulate its projections.
This provides an interesting trend line and insight as to the cyclical nature of the real estate cycle--and the upcoming surge in gross rental rates across the country. The study points out that nationwide, gross rental rates bottomed out in 2004, and will grow at over 17 percent over the next three years, with the trend most likely to continue past 2010. In some markets, it is projected that rates will increase by more than 35 percent in this same timeframe. In reviewing this, consider the following:
* The projected rates for 2008 are still well below 2001 levels.
* Operating expenses, often the largest component of a gross rental rate, have increased substantially in the last five years.
* Construction costs (labor and materials) have skyrocketed over the past two years, causing 1)...