Commercial landlords are upping their game — and turning to technology

Posted by: TheGuarantors on December 6, 2018

Last week, several of New York City’s top real estate executives gathered at Bisnow’s NYC State of the Market conference to discuss key trends and practices in commercial real estate in 2018, as well as the outlook for 2019.

Panels throughout the day highlighted how to score capital in the current environment, the amenities arms race for landlords, and the future of leasing, among other topics.

Kevin Chin, VP of Sales at TheGuarantors, shares his key takeaways and highlights from the conference:

How to Score Capital in the Current Environment

Commercial mortgage-backed security markets are very healthy with abundant liquidity available to borrowers. With asset values near peak levels, many traditional landlords are launching debt/lending platforms — which offer access to a more attractive risk-return profile relative to equity investments. Silverstein Properties’ recently launched project, Silverstein Capital, was highlighted as one of these new platforms, investing across the debt spectrum.

The growth of these lenders comes as a result of a void created by banking regulation. Banks are highly constrained and even prohibited from participating in the more bespoke and highly leveraged deals. All of the panelists agreed that rising interest rates would continue and that should prove positive for the lending environment, especially if rates rise due to improving economic fundamentals.

The Amenities Arms Race: Tenant Demands

In the current landscape, tenants have greater amenity bargaining power over their landlords when choosing buildings. Amenity demands can come in many forms, including tenant improvement allowances, nice lobbies, rooftop spaces, security guards, and more.

Co-working has helped raise the bar for building offerings, with many buildings providing well-designed office and common spaces and highly engaged community managers. When certain tenants graduate out of a co-working space and re-enter the traditional office market, they have come to expect these amenities and a high level of service. As a means to compete, traditional landlords have opened their own branches of co-working including Silverstein’s Silver Suites, Sage Realty’s Swivel, and Boston Properties’ Flex.

Some of the amenities the panelists highlighted as critical to tenants included exceptional phone service, pantries, quiet spaces, and ancillary services such as the ability to order anything at the touch of a button.

What the Future Holds for Leasing

The office real estate market will continue to see businesses demand spaces that help them increase productivity and make their employees happier. Emphasis especially falls on the ability of employers to showcase their office spaces to potential recruits and to retain employees.

While tenants are increasingly asking for significant amenities, they have also increased their concession demands, with landlords noting that concession packages have “ballooned” in recent years. However, with rent prices rising in recent years, the relationship between the two has generally remained the same. Tenants are swapping out of commoditized spaces into custom spaces with heavy build-out/tenant improvement allowances. With the inflation in construction costs, this is more expensive for the landlord on the front end, which often results in higher security deposits or tenant improvement financing packages for tenants. That said, the largest impediment for a tenant moving is the outlay of capital.

What’s clear is that the commercial real estate market in New York City is changing. Landlords are becoming increasingly aware of tenant amenity demands and finding ways to compete against co-working. As landlords seek to provide more amenities and customized spaces for tenants, the cost to move for a tenant may create a hurdle to closing a deal.