2019 has seen a continuation of tech and media tenants grabbing up available office space in and around Los Angeles. According to commercial brokerage Savills, leasing activity in the second quarter of 2019 reached 5.3 million square feet – a three-year high. Leading this leasing frenzy are companies like Netflix, Amazon, Apple, Facebook, and Google. This is driving up rents and tightening up availability. They are also driving up TI allowances. TIAs that not many other tenants can negotiate. In this blog post, the Los Angeles tenant improvement contractors at H.W. Holmes, Inc. take a closer look at what’s happening here.
In January of 2019, Alexi Barrioneuvo at The Real Deal wrote about a FAANG that was taking a bite out of the LA office market. FAANG is an acronym for Facebook, Amazon, Apple, Netflix, and Google.
These Silicon Valley tech and media giants are now occupying hundreds of thousands of square feet of commercial space in hot markets like West L.A., Hollywood, and Culver City.
How are they landing this space in such high-demand markets? They’re highly-desirable tenants. The FAANG companies are signing long-term leases. Securing occupancy and guaranteeing rental income for landlords for 5 years or more. Sometimes for blocks of space at a time.
This is getting them concessions from landlords that other tenants couldn’t negotiate. The long-term leases make it feasible for landlords to offer a substantially higher tenant improvement allowance (TI allowance) than they’d offer anyone else. They’re basically bending over backward to land this kind of tenant. Even if it means spending more than usual to accommodate specific modifications this tenant wants or needs.
Three factors play into how much a landlord is willing to offer.
1. The length of the lease
2. The rental rate
3. The square footage
TI allowances are a huge part of the lease negotiation process. The landlord and tenant agree to an amount. The landlord approves the changes the tenant is requesting. The tenant is responsible for anything above the agreed-upon amount.
BUT TIAs AREN’T THE SAME FOR SMALLER COMPANIES WITH SMALLER BUDGETS
Tenant improvement budgets aren’t going as far as they used to for smaller less desirable tenants. This is because construction costs are rising. What used to be an adequate TI allowance is no longer covering what it used to. This means projects are commonly running beyond the allotted TIA. Resulting in tenants either bearing more of the cost of modifications or scaling back their original design plans. Perhaps not even moving at all due to budget constraints.
Simply put, the TIAs that landlords are offering these days isn’t in line with how much materials and construction have gone up. The FAANG companies don’t have to worry about this. They have plenty of money. They can pay higher rents. Sign longer leases. Occupy more square footage. And even afford to cover some out-of-pocket expenses if the TIA offered doesn’t cover all requested modifications. But that’s hardly been a problem because of the high-dollar TIAs tenants are scoring in negotiations.
TALK TO A LOS ANGELES TENANT IMPROVEMENT CONTRACTOR TODAY
If you’re a landlord or tenant in the Los Angeles area, H.W. Holmes, Inc. is a highly-reliable and well-reviewed tenant improvement contractor serving Ventura, Santa Barbara, and Los Angeles counties. Call us today at (805) 383-9929 to discuss your project.