Tenants in ‘catbird seat’ as landlords attempt to fill glut of office space

Commercial real estate brokers suspect that Boulder County vacancy rates have topped out, but they say tenants still are operating from a position of power and could strike the deal of a lifetime – if they strike fast.

“Anybody who’s actually getting toward the end of their lease is really in the catbird seat,´ said NewOption Partners’ Paul Whiteside. “You can always save money in this kind of marketplace and get into a great building. What happens in three or four years? Who knows. But a long-term deal now can pay off.”

Statistics are hard to come by, but consider the anecdotal evidence: six months to a year rent-free; subleases in class-A space on the U.S. 36 Corridor between Denver and Boulder offered for $6, triple net; fatter tenant finish allowances; and companies trading ho-hum digs in utilitarian flex/office parks for more posh space without increasing their rent expenses.

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But this is almost exclusively a tenant’s market, Whiteside said. Although interest rates are lower than ever, deals for investors are tough to find.

“This is a great time for tenants to lease spaces with lots of rental concessions up front,” Whiteside said. “It’s not necessarily time to buy.”

That, too, could change. “If properties remain vacant for much longer, we will see some people hurting, and some values will come down,” he said.

Boulder broker Becky Callan Gamble estimates lease rates in downtown Boulder may have fallen off 10 percent to 15 percent, and dropped 25 percent across Boulder, which is testing landlords’ entrepreneurial mettle. “Anytime supply outweighs demand, it’s in a user’s favor, and that’s the market we’re in right now,´ said Gamble, a partner in the Boulder commercial brokerage Dean Callan. “All sophisticated landlords understand that they’ve got to be creative and aggressive in attracting tenants right now because there is so much direct and sublease space on the market.”

In its most recent commercial vacancy report, Boulder-based Andrew Freeman Property Advisors Inc. estimated total vacancy for Boulder and Broomfield counties and Westminster at about 21.9 percent, compared with 8 percent in fall of 2000. Boulder’s overall vacancy rate is about 15.6 percent; downtown Boulder is about 12 percent vacant.

Even Dean Callan’s office building on 28th Street near Arapahoe Avenue has a Free Rent sign hanging from its second-floor balcony. About 1,800 square foot space in the building has been vacant for about a month. Gamble said the building’s ownership group, which includes the brokerage, hopes to fill the space quickly by offering a few months of occupancy rent-free. “Plenty of people will be giving free rent right now,” Gamble said. “Some are more willing than others to promote it.”

But the free ride won’t last for long.

In the Northwest Corridor, the area most affected by the telecommunications downturn, big deals are steadily chipping away at a vacancy rate estimated at just less than 50 percent.

The Northwest Corridor contains about 9.2 million square feet of commercial development. It is bounded on the east by Interstate 25, on the west by McCaslin Boulevard, Arapahoe Road to the north and the city of Wheat Ridge to the south.

“There are some good deals out there, no doubt about it,´ said Scott Garel, senior managing director of Frederick Ross Co.’s Ross Brokerage Group. But the chances for a deal are going fast.

Spatial Technology has leased 35,000 square feet in Westmoor Technology Park in Westminster, and AOL-Time Warner has a deal at Church Ranch for 20,000 square feet. American Scandia Life Assurance Corp., which had been shopping its four-story building in CirclePoint Corporate Center in Westminster, ended up subleasing one floor to Clear Technology and reoccupying the remaining three. That deal knocked 120,000 square feet from the inventory.

“We figured out there have been about 460,000 square feet of deals signed in the Northwest Corridor since the first of the year,” Garel said. “When it’s all said and done, we’ll end up seeing 600,000 to 700,000 square fee to absorption up there, which is nothing to be shy about. Those are decent numbers, considering where we came from.”

Activity also has been brisk at Colorado Technology Center in Louisville, where MaxOptix Corp., which will change its name to Peak Storage Solutions Inc. April 8, leased 40,000 square feet, and Vaisala Inc. purchased eight acres, where it will build a new 39,000 square foot building and, later, a second building next door.

Real estate experts expect Vaisala to spend $90 to $120 per square foot, including land costs, to build a new home for its U.S. production operations. “The price was the determining factor, said Hannu Patrikainen, general manager of the company’s Boulder County operations.

The Finnish maker of industrial and environmental test instrumentation will leave facilities in Boulder, Lafayette, Woburn, Mass., Plain City, Ohio and Sunnyvale, Calif. Employment rolls will jump to 70 from 50 by the time the Louisville building opens this fall. Louisville’s total vacancy rate is about 18.2 percent.

Garel also said offers have been made on the Geneva Pharmaceuticals headquarters building in Broomfield, a 93,000-square-foot Class A office building that is for sale at $7.5 million, and that the posh, 46,000-square-foot MatchLogic building in Westminster was under contract fewer than three months after the failed Internet marketer moved out in January.

“We think we’ve seen as much fallout as we’re going to see up there,” Garel said. “We’ve got our fingers crossed, anyway.”

At Interlocken business park and in developments immediately adjacent, vacancy rates are estimated at about 60 percent. But that number, too, is beginning to shrink. PA Consulting signed for 10,000 square feet at 390 Interlocken, and Kaiser-Hill Company LLC leased 95,000 square feet at the nearby Mountain View II building. Still, Level 3 Communications Inc. has had two large buildings on the market for more than nine months; one is finished, the other is not.

“Class A space is still the hole in the market. It’s a real challenge to get it filled,” Garel said. “Class A buildings are getting discounted, and tenants are receiving great value because of it.”

But companies intrigued by rock-bottom sublease deals should be mindful of the financial condition of the sublessor, he said. “If the sublessor defaulted, you could get thrown out of the building.”

In Longmont, where commercial lease rates are reportedly $3 per square foot cheaper than like space in Boulder, marquee companies, like Intrado Inc. and Amgen Inc., have been lured by less expensive land, low lease rates and impressive tenant finish allowances. Still, the overall vacancy rate remains around 22.4 percent.

“It’s no secret that we’ve been slow for the past six to nine months,´ said Larry Green, whose company Larry Green and Associates specializes in commercial development in Longmont.

Green also said land prices have slumped in the past few months. “If I were to take a snapshot today, I’d say that’s stopped. But we aren’t seeing prices go back up. I think we’re bouncing around at the bottom before starting back up again.”

Still, he said, developers have started to sniff around again. Green said four or five groups have asked for information about his 91-acre mixed-use, planned unit development near the main entrance to Ute Creek Golf Course. “My sense is that big developers, whether residential or commercial, never really stop. They may be cautious about what they buy, but they have to keep their pipeline full,” he said.

In Lafayette, where total vacancy is estimated at about 35.9 percent, landlords are holding tight to their asking prices, but may throw in extra tenant finish allowances, said Thom Widawski, managing broker of Colorado Group-East Inc. Landlords who offered $25 per square foot in tenant finish last year may push that rate up to $30 or $35, if they’re getting a three- to five-year lease at the asking rate. “But we aren’t seeing the discounted lease rates,” he said.

The promise of two big projects – the Northwest Parkway and Exempla’s proposed hospital and health-care campus – is keeping the speculative market fairly stable – at least among professional investors. “Amateur investors might not have the depth of pocket or patience to wait,” Widawski said. “That’s where the deals are getting cut.”