Zombie Office Buildings – What is it, and why do I care?
No, this isn’t a sensational blog post about how the vacancy in Atlanta’s office buildings reminds us of Zombieland. Sorry to disappoint. It is, however, a blog post about an important concept for office tenants in Atlanta to be aware of while looking for office space.
So what is a Zombie Building? A Zombie Building refers to an office building in which the owner of the building doesn’t have the necessary capital to fund a “normal” tenant improvement allowance for a new or existing tenant within their office building. Therefore, that particular building will have a hard time renewing or enticing a new tenant to sign a long-term lease that requires a “normal” tenant finish in the tenant’s office suite within the said Zombie Building. Consequently, no matter how long of a rental rate that building is quoting, it may not be the right deal for you.
Why would an office tenant care? If you’re currently looking for office space in the Atlanta market, make sure to be aware of the Zombie Buildings. You don’t want to waste your time in negotiations, if at the end of the day the owner cannot fund the proper tenant improvement allowance to get your suite build-out to your specifications. There are plenty of options available in the Atlanta market to not have to deal with a Zombie Building. This also could mean that the buildings quoting higher rental rates, might be doing so because they have the capital to fund a build-out allowances when others buildings don’t have the capital. So ask your Tenant Representative to steer you clear of the Zombie Buildings, and point you in the direction of the well capitalized office buildings.
Below is a great article from CityBizList giving you more detail about a Zombie Buildings. To see the original text, please click on the title of their
The amount of available space in office markets nationwide is overstated – perhaps significantly - says Grubb & Ellis, due to a phenomenon dubbed “Zombie Buildings” by the company’s researchers. Zombie Buildings 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, 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 cafes, 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.
- 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 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 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.
- 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.