The phenomenon, dubbed “Zombie Buildings” by Grubb & Ellis researchers, refers to properties that have significant capital constraints and are therefore unable to fund market-level tenant improvement allowances and commissions, which adversely impacts their ability to compete for tenants.
“Now that the values of many properties purchased during the peak of the market have fallen below the balance due on the loan, some landlords are too capital-constrained to offer the tenant improvement allowances and other concessions necessary to attract tenants in today’s marketplace,” said Robert Bach, (top right photo) senior vice president and chief economist.
“One caveat to the trend, however, is that the wave of foreclosures was much less severe than anticipated. We expected banks to be proactive in taking distressed assets back, but instead, they’re avoiding taking those write-downs by helping landlords retain their assets,” he added.
“That being said, the fact remains that many landlords are unable to offer the kinds of tenant improvement allowances and other concessions that require capital on hand. That’s good news for landlords who are in a good capital position – they have much less competition than the reported market statistics would indicate.”
A summary of this trend occurring in key markets across the nation includes:
· In Atlanta:
Some landlords are handing the keys back to the bank, prompting operational challenges as properties transfer ownership. Landlord stability has become increasingly important to tenants as they seek buildings with solid owners capable of funding tenant improvements and maintaining critical building operations. Additionally, amenities such as cafés, restaurants, sundries shops and dry cleaning services normally associated with Class A and Class B+ buildings are at risk of ceasing operations due to decreased foot traffic.
In Boston:
· The Boston market in particular is seeing the active investors of 2006 and 2007 challenged by decreased property values, causing several trophy Boston-area office buildings to go back to the lender. Several other landlords have been unable or unwilling to make capital improvements to their buildings, including necessary systems upgrades, removing those from broker tours as well.
In Portland:
· In downtown Portland, a large portfolio of historic properties is currently in bankruptcy, making 15 percent of the Class C space in the downtown market not competitive due to their financial uncertainty. Financial records are being requested on both sides of the table – landlords want to make sure their tenants will be viable for the full term of the lease, while some tenants are going so far as to require a letter of credit from landlords until all tenant improvements are completed.
In Chicago:
· In downtown Chicago, the landlords holding as much as 20 percent of the office inventory are not in a position to compete aggressively, but for those landlords in a stronger financial position, they’re actually able to keep asking rental rates at higher levels than would otherwise be achievable.
In Texas:
· While considered to be a healthy market, Texas is estimated to have more “Zombie Buildings” than well-capitalized properties throughout the state. Unlike many other markets, however, tenants are still renewing leases and touring “Zombie Buildings.” That being said, tenants frequently negotiate a back-up lease in the event the negotiations with the “Zombie Building” landlord falls apart, usually due to lack of lender approval of lease terms.
Contact: Erin Mays, Phone: 312.698.6735, Email: erin.mays@grubb-ellis.com
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