COLORADO REAL ESTATE JOURNAL

September 4 - September 17, 2002

Prior to 2001, tenants in the Denver office market were at the mercy of landlords who controlled the office market. With the abrupt slowdown in the economy all that has changed. Today we see a very different picture. With approximately 15%% of office space to lease and sublease in just the downtown market alone, tenants have an opportunity to take advantage of the economic opportunities in today's soft office market by relocating to new space or renegotiating their existing lease. The best buys can be found in the burgeoning sublease market. Tenants need to be aware of the broker's position as required by Colorado state law. It is important to understand that brokers who list space in office buildings work for the best interests of the landlord. They must disclose to the customer, the potential tenant, that they represent the landlord. This is applicable in a lease renewal as well. On the other hand, a tenant representative exclusively represents the interests of the office user. Following are the services that should be provided by a professional tenant representative:

Strategic Planning: Identifying the Requirement

Before making the decision to search for new space, the broker working for the tenant will help analyze a company's space requirement and discuss the business terms and issues related to the company's operation before entering the market. It may well be that it is more economical to remain in the existing space than to relocate to a new space. This is an equally important time to have a broker representing the tenant who is at the mercy of the landlord. A tenant representative levels the playing field by notifying the landlord that the tenant is engaged with a professional who is informed and knowledgeable about the market.

Market Survey: Identifying the Deal Once the space requirement is determined, the broker will initiate a market search using various databases. A report is produced, delineating spaces that best fit the requirement both in location and price. The report also lists amenities and physical conditions of particular buildings in addition to parking availability. Because of media attention to the current market conditions, smaller tenants, under 10,000 square feet, have unrealistic expectations regarding the terms and conditions. For these tenants direct leases with landlords, especially in the central business district, are at rates that are only 10 to 15 percent below a year ago. However, these transactions offer free rental periods that effectively lower the rate over the term of the lease. Additionally these leases include generous tenant improvement package. Clients also need to understand that the larger the square footage being leased, the more leverage there is for the tenant.

While there is plenty of space to choose from, the lower rents are found more readily in the sublease market. While these spaces often are taken with little tenant improvements, larger cuts in the rental rate and free rental periods can bring these transactions to very favorable effective rates.

Negotiations: Securing the Space When a potential space is identified, the experience of the tenant representative in negotiating the terms and conditions during the offering and lease negotiations should prove valuable in achieving what best suits the tenant's business needs. This expertise will result in compliance with the current market conditions. Additionally, a good tenant representative truly differentiates his or her value by providing services beyond the lease execution. A transaction does not end with the execution of the lease. There are many aspects of the project to be properly planned, coordinated and implemented. From the initial definition of the requirement to well after move-in, these services guarantee continuity and quality. A broker who can provide expertise in this area enables the client to save time and money and meet the desired occupancy date.

Who Pays The broker who represents the landlord pays the tenant representative. In other words, the landlord's agent cooperates with the tenant representative by sharing the fee, which the landlord has agreed to pay for completing a transaction. Commissions in the commercial real estate industry can be paid based on a dollar amount per square foot, which is the more common in the Denver office market. Or the commission can be based on a percentage of the value of the lease. This is often found in the industrial and flex space markets.

In summary the issues involved in locating new space, or renegotiating an existing lease, are time-consuming and more complex today those in years past. The process requires the services of a real estate professional who specializes in tenant representation, one who exclusively represents the interests of the tenant. Retaining a tenant representative is much like hiring a CPA, securing an insurance agent or an attorney - each an experienced professional whose job is to advise on what is best for you or your company. Signing a new lease for office space, which represents the second-highest cost of operating a business, is an important business decision and requires the services of a professional adviser - someone who exclusively represents the interests of the tenant in today's marketplace.


pwray@wrayassociates.net
700 E 9th Ave., Ste 205    •     Denver Colorado 80203     
  Phone 303.320.4488    •     Fax 303.377.2003

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