Thanks to downsizing, soaring real estate rents -- which reached historic highs in 2000 -- may be a thing of the past. According to a Federal Reserve report released in June, commercial real estate prices have softened and vacancy rates risen in many parts of Atlanta, Boston, Dallas, New York, Philadelphia, and Richmond, Va.
The death of the dot-coms aside, downsizing drives at many large companies has meant that corporations are saddled with space they cannot use. As the Fed report noted, that has led to a significant increase in subleasing activity. "It's much more than the dot-coms," says Jay Neveloff, a New York real estate attorney with Kramer, Levin, Frankel & Naftalis. "It's those larger tenants who had planned continued growth but are now contracting."
Many small businesses, on the other hand, grew conservatively during the boom and continue to expand at a steady pace. For them, this could be the best time to cash in on prime office space. "If a small business wanted to be in midtown Manhattan," says Neveloff, "this is an opportune time to make that move." Vacancy rates in Midtown South are at the highest levels since 1997, according to the Fed report.
GET IN WHILE YOU CAN. It's a similar story in San Francisco: "There are a number of subleases that have been turned loose by downsizing and retrenchment," says Vernon C. Watters, an attorney with the real estate practice of Holland & Knight in San Francisco. "There is an opportunity for small businesses to get space in a premier spot now. Landlords are willing to split a floor, where a year ago they would wait for a large company who would take the whole floor and grow further within the building."
Rentals in the Bay Area are as much as 50% lower than last year, says Jon Wittemyer, senior managing director of Insignia Real Estate, a San Francisco real estate brokerage firm. "Demand is 15% lower than last year, so there are opportunities for small businesses to come back in," he says. "Up until early last year it really was challenging for small businesses to compete."
Although brokers say commercial real estate markets could weaken further if the economy continues to slide, most agree that small businesses should act while they can to acquire prime space in the major cities. One thing to remember when negotiating a lease: When times improve, small business is usually the first to be elbowed out of the market. By Naween Mangi in New York