Retaining Office tenants in a downturn
can be costly

Building owners, trying to keep the tenants they already have,
are renovating spaces and making lobbies shine.

By DON JACOBSON, Special to the Star Tribune

March 28, 2010 – Hanging on to office tenants is Job No. 1 for building owners and property managers in this day and age, with vacancy rates still on a steady rise that started in late 2008. One way they're trying to deal with it is to work with tenants to upgrade and renovate their spaces and to spiff up the buildings themselves.

There's no question that tenants with means are in a powerful position now. The Twin Cities showed a metrowide office vacancy rate of 19.2 percent in the third quarter of 2009, with the key southwest sector standing at a disturbingly high 22.3 percent, according to Cassidy Turley Commercial Real Estate Services.

Those kinds of numbers have prompted corporate users to shop around like never before, and building owners have responded by showing a willingness to invest scarce resources into renovating tenant spaces as well as common areas and building exteriors, industry players say.

The economic downturn has divided building owners into classes of haves and have-nots, with the haves – those whose debt loads that are not prohibitively high – investing capital for renovation work.

Contractors such as RJM Construction of St. Louis Park say they're seeing more such jobs.

"Owners are upgrading lobbies, elevator systems and building cores," said RJM President Bob Jossert. "They're making sure their buildings are looking nice, painting and fixing up the lobby areas. It's not a big volume of work. They're not gutting buildings, but they're making them look sharp. That way they're trying to stay one step in front of the tenant reps."

Jossert said tenants are being very aggressive in looking for deals, in some cases "asking for the moon" and hoping to take advantage of rock-bottom construction labor costs. But, he said, contractors are trying to act as go-betweens to find a balance between tenant expectations and cash-strapped building owners.

Sometimes it has worked. Among the renovation projects RJM has done recently is one for CIGNA Behavioral Health, which is recruiting 180 new employees to its offices at 11095 Viking Drive in Eden Prairie and renovating its space there, and another at the Alliance Bank Building in downtown St. Paul.

"We'd have tenants come to us before, saying they wanted to do estimates for maybe three or four spaces," Jossert said. "Now, we'll do up to eight estimates for some folks. They're not actually relocating any more than they used to, but they're looking at everything."

How Carlson said thanks

Minnetonka-based Carlson Real Estate Co., which owns and manages 6 million square feet of commercial space in the Twin Cities, is well aware of the ultra-competitive market and recently worked with SRF Consulting Group to completely refurbish its 70,000-square-foot space at One Carlson Parkway as part of signing it to a new 10-year lease.

Carlson President Matt Van Slooten said the job was an example of how his company is determined to keep valued tenants from being lured away.

"They had been there for 20 years, and they'd never had a complete refurbishing of their offices, and with this renewal we ended up doing a major update to their space," he said. "We appreciated their long-term tenancy and this was a way to demonstrate that."

Van Slooten said Carlson Real Estate is dealing with the severe market by putting more effort into trying to get tenants re-signed well before their leases are up, and part of the enticements are upgrades to the buildings. The common areas of One Carlson Parkway were refurbished, and the company's downtown Minneapolis landmark Plaza Seven Tower is also in line for upgrades in a bid to stay competitive, he said.

"Vacancy levels are the highest since 1991, and in the southwest submarket, they're at their all-time highs," noted Steve Chirhart of TaTonka Real Estate Advisers, a Minneapolis tenants' representative firm. "Landlords are cognizant of the fact that tenants are downsizing and need less space, and in response they're keeping their properties more attractive."

But, he said, tenants are finding that some building owners are better able to carry out such improvements than others.

"On one hand, you've got stable owners looking to do everything they can to position their properties competitively, especially those with higher vacancies, and keep their existing tenants," Chirhart said.

Others landlords, however, are debt-laden and feel their operating margins being squeezed.

"Some owners are cash-strapped and are trying to conserve in ways that aren't seen in most market times," he said. "There's only so much you can do in some cases. Some landlords' main motivation is to weather the downturn and meet their debt service. That has become a very important element in negotiations now – something we never really had to deal with in the past."

Don Jacobson is a freelance writer based in St. Paul.

Carlson Real Estate Company is an affiliate of Carlson, a global group of integrated companies providing hotel, marketing, restaurant and travel services directly to consumers, corporations and government entities. Carlson Real Estate Company is dedicated to developing long-term client relationships by operating with caring and integrity and providing innovative and accommodating solutions. Its portfolio of office and flex/industrial space concentrated in Minnesota, Arizona, and North Carolina exceeds 6 million combined square feet. For more information about Carlson Real Estate Company, visit www.carlsonrealestate.biz.