The foosball table blues !
Moving on up
Small firms land better digs amid glut
denverpost.com
By Mark P. Couch
Denver Post Business Writer
Sunday, October 20, 2002 - Small-business tenants, spurred by the wave of telecom troubles, dot-com failures and hesitant corporate giants, are scoring sweet deals in the worst market in a decade for office-building landlords.
A breed of bargain-hunting, creditworthy small tenants are renting corners of buildings in the Denver-area office market, which is flooded with too much space, falling rents and weak demand.
“The beauty of us looking now is that there’s a lot of vacant space,” said Michael MacPhee, vice president with McGuire Environmental Consultants Inc.
McGuire joined the fray this fall when it escaped to a trendy street-level space from a small non-air-conditioned LoDo office above a sushi restaurant.
Small businesses — the kind that landlords ignored or charged higher prices — now wield bigger sticks.
Some real estate brokers blame the Foosball factor.
During their late 1990s heyday, carefree high-tech companies installed basketball hoops, $1,000 Foosball tables and other toys to stoke the imaginations of their cadre of code-slingers and Mountain Dew drinkers.
“I’ve been in eight buildings where the company had a Foosball table,” said Sam DePizzol, broker with The Staubach Co. “Those companies are all bankrupt.” The high-tech meltdown is the prime suspect in the glut of space, compounding the woes of landlords in a slowly growing economy.
But for DePizzol’s clients and others like them, the excess office space offers deals galore. Tenants — if they have strong credit and can afford to move now — have more choices and cheaper rents.
Small tenants are negotiating terms that would have been laughed away two years ago at the crest of the tech boom.
A few examples:
NextGen Corp. moved into an empty suite across the hall in its southeast-suburban office building but persuaded the landlord to renumber the offices so that NextGen wouldn’t have to reprint its business cards and corporate stationery.
Gericare Providers Inc.’s new landlord in the Inverness office park will pay off the three years remaining on the company’s existing lease to get Gericare Providers as a tenant in December.
McGuire Environmental moved to a new LoDo address but won six months of free rent to help the company cover the remaining term on the building it was leaving behind.
In each case, the companies are paying rents that are lower or comparable to what they were already paying. And, for Gericare Providers and McGuire Environmental, the new space is a significant improvement in quality.
The companies that score big points with landlords have stable businesses, solid prospects and strong credit.
“If it’s somebody with a pulse and a good credit history, it’s a big deal,” said Todd Roebken, principal with Cresa Partners, which represented Gericare Providers on its new lease.
These companies are prime examples of the popular tenants in today’s market. NextGen provides backup power-supply systems; Gericare Providers offers home delivery of disease-management and wound-care supplies; and McGuire Environmental sells engineering services to monitor drinking water.
Gericare Providers is a solid moneymaker with a growing customer base.
Mitch Knutson, Gericare Providers’ president and chief executive, said his company’s profit is about 40 percent on monthly sales of about $1 million.
Knutson estimates his real estate deal will save about $900,000 in costs compared with what he would have paid two years ago at the peak of the market.
Gericare Providers negotiated an eight-year lease on 27,000 square feet at 67 Inverness Drive East. The company’s 40 local employees are currently crammed into a 10,000-square-foot space at 109 Inverness Drive East.
The new space was constructed more recently than the one his company is leaving behind. The new space has a view of the mountains; the company’s existing ground-floor space looks out at shrubs and a parking lot.
The new landlord chipped in funding to renovate the space but will allow Gericare to buy new furniture with the money — a condition that landlords rarely allow because furniture is not a permanent fixture in the office.
“We got gigantic concessions,” Knutson said. “My attorney had never seen a deal that good.”
Knutson already knew the space because he invested thousands of dollars in the building’s former tenant, Convergent Communications.
At the time, Knutson wondered whether Convergent was spending too much money on its office space with trendy wall dividers and other high-priced equipment.
He got his answer in April 2001 when Convergent filed for bankruptcy. Knutson lost the money he invested, but now he’s inheriting a piece of the company’s space.
Knutson calls it “justice” that he’s moving into the space.
“I remember when I went to their open house,” Knutson said. “I thought, ‘Is this what they’re spending my money on?’ My first impression is that I would never spend money on that stuff when I was first starting out.”
Knutson’s new landlord, Mack-Cali Realty Corp., sat with the building empty for more than a year and tried to sell its Denver-area portfolio for $175 million. The company dropped that plan in June because of Denver’s soft real estate market.
The Denver-area office market has shown few signs of improvement during the past year.
Cushman & Wakefield of Colorado, a brokerage firm, reported that the office vacancy rate in metro Denver rose to 16.3 percent in the third quarter, compared with 11.1 percent a year ago. The average quoted rental rate fell to $18.48 per square foot compared with $20.36 per square foot a year ago.
Another brokerage, Trammell Crow Co., reported that more space became available than was rented in metro Denver. According to the company’s third-quarter report, the amount of available space grew by more than 1.6 million square feet, an amount larger than the Wells Fargo “cash-register” building downtown.
That means empty office buildings dot the Denver landscape and offer multiple rental choices. The balance of power shifted to the small tenants during the past year as large companies put their real estate decisions on hold.
Tenants who once swallowed steep rent-price hikes, sub-par space and other terms dictated by their landlords are now putting their demands on the table.
NextGen is tiny compared with its landlord. NextGen is leasing 4,500 square feet from a division of Principal Financial Group, which owns hundreds of buildings and millions of square feet across the country.
“We got a rate that is better than what we had been paying, but not as good as what we could have gotten if we moved into another building,” said NextGen president Joe Lechtanski. “But the hassle of changing all our literature, our website, getting a new phone number — it was worth a few cents on the rent.”
Even at a few cents higher, the rent is about 30 percent lower than the average prices charged about two years ago, Lechtanski said. The landlord also included money to paint the interior and install new carpet.
Unlike NextGen, McGuire Environmental’s space didn’t need a makeover. The space had been remodeled about a year ago for a tenant that rented cubicle space by the day.
“We found a space that fit like a glove,” said MacPhee.
McGuire Environmental moved its 11 employees into a 5,000-square-foot space at 1855 Blake St. about 3 weeks after signing its deal.
The employees are happy that the company is staying in the same area of town, MacPhee said, and they get a space where the air conditioning works. The company’s previous landlord refused to give McGuire a discount on the rent for the inconvenience.
The new landlord built a small kitchen space for the company and allowed McGuire to take over the already-installed security system, MacPhee said.
“The value that we’re getting on this space is the layout and the location,” MacPhee said. “But we negotiated a better deal because of all the vacancies.”
Gericare Providers’ Knutson said landlords cannot afford to act like they are renting space in a vacuum. Some landlords wouldn’t budge on their rent and missed signing hiscompany as a tenant.
Based on his review of dozens of empty spaces, Knutson said those landlords could be waiting months, or even years, before another tenant comes along.
“Mack-Cali offered a lot of incentives up front, but you know what they got in return?” Knutson said. “They got a long-term deal and a solid tenant.” |
