Commercial Real Estate & Advisory

Once-Shunned Tenants Now Get Royal Treatment

By Lore Croghan | August 10, 2003

When Robert Appelblatt and Tim Crean went looking for a small space to house their brand-new postproduction firm, they did not expect much of a response from the city’s real estate community.To their surprise, what they got was a gaggle of more than two dozen landlords eager to sign them up.  In the end, Messrs. Appelblatt and Crean threw their business to the landlord who was literally willing to move walls to rent them a mere 3,000 square feet.First, Flatiron district property owner Andrea Perl reconfigured their layout at 32 W. 22nd Street to make it more to their liking.  Now, she’s building them a new bathroom and kitchen, neither of which was part of the original lease agreement.”We thought we got a good deal,” says Mr. Crean, the creative director of the new business, which is named Suspect.  It turned out to be an even better deal.”These days, small companies-even those with no track records, no credit ratings and, at best, modest space needs-are being treated like lords.  Building owners from 34th Street to South Ferry are courting the architects, interoir designers, branding firms, commercial photographers and production companies that they once shunned as too volatile to be dependable rent payers.Medical practices and holistic medicine facilities such as yoga centers are also enjoying a new vogue.Though most of them need 10,000 square feet or less, these tenants are being offered rents in the $20’s per square foot or less, greatly reduced security deposits, months of free rent and generous funds for office construction.Doting Game”We were doted on in every building we visited,” says Alan Vartabedian, president of Vartabedian Interiors, recalling a recent space search for 3,400 square feet that landed him in downtown’s land-marked 48 Wall Street.  “It was almost embarrassing.”  Of coarse, there are limits to landlords’s largesse.  The tenants they will always love the most are blue-chip firms with impeccable balance sheets, which impress the lenders that finance their buildings.  In contrast, creative firms have fluctuating revenue streams and are not considered creditworthy.  That’s why most of them are getting five-year leases instead of longer-term deals.Landlords are hoping the office market will recover by the time the leases expire-and then they’ll be able to raise rents substantially, or get new tenants with better financials.Receptive for NowThat day of reckoning feels like it’s far in the future, though, what with the warm reception that second-tier tenants are getting in so many midtown south and downtown neighborhoods.  These businesses are right up there on the popularity cart with nonprofits, which also get a chilly reception from landlords in hot leasing markets, but are now being fought over. The newly popular tenants sense a whiff of desperation, and they’re right.  The huge, multiyear security deposits that landlords got from now-departed dot-coms have run out.  Filling the space that the Internet firms left behind many months ago would mean the difference between profit and loss for these properties-even if takers are noncredit tenants paying relatively low rents.Second-tier companies looking for space have been quick to seize their new advantage.”Tenants feel they have something to say in the deal,” explains Michelle Stone of Sinvin Realty Corp., the broker for Messrs. Appelblatt and Crean.  “They can hold firm on their rent prices, and walk away from deals.”Thanhause Esterson Kapell Architects did just that after principal Charles Thanhauser decided he didn’t like all the add-on charges that the landlord proposed at 19 Union Square West.  A couple weeks after he broke off talks he got a call to reconsider.Ultimately, TEL got owner AB Partners to eliminate many of the add-on, lower rent, cut the security deposit and throw in a lengthy period of free rent.TEK’s experience is increasingly becoming typical.  Second-tier tenants are paying 2 months security rather than twelve.They are getting generous work allowances to construct offices, which landlords south of 34th Street were loath to give in the past.Even more telling is the low rents these tenants are getting.  When landlords don’t want to officially cut rates below $20 a square foot, they’re building into the leases a month of free rent each year, which effectively lowers what tenants pay to $18 per square foot.In one of the most startling signs of the shifting of balance of power between landlords and small tenants, these concessions are being given to firms that lack what used to be considered the key ticket to the negotiating table-a set of financial statements showing consistent profits.Because these businesses can’t sell their creditworthiness, they tout their credibility instead.  This means that landlords sit through showings of DVDs full of commercials that landlords sit through showings of DVD’s full of commercials that post-production companies helped to make, in order to get to know their prospective tenants through their work.Brokers introduce tenants to prospective landlords with presentations that are as polished and detailed as ones the businesses themselves would give to win job assignments.  Mark Weiss recently did this for museum designer Ralph Appelbaum Associates.”People were more interested who the tenant was than what the P&L statement looked like,”says the Newmark & Co. Real Estate Inc. broker, who went on to clinch a lease deal for Appelbaum at downtown skyscraper 88 Pine Street.New Litmus TestInstead of looking for tenants with consistent profits, landlords are increasingly likely to settle for businesses that can at least show a stable roster of clients, or a long history.”I’m representing a PR firm, a service business, with a balance sheet of last week’s receivables,” says Tristram Pough, president of brokerage Edward Warren & Co. “But they’ve been in business 25 years.  Everyone’s keen to have them.”