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The Most Common Types of Commercial Real Estate Leases: Full Service, Modified Gross and Triple Net

In commercial real estate, there are typically three different types of leases structures. Knowing the characteristics ensure you know what to financially expect and budget for with your monthly office rent. In Tampa Bay, a particular type of lease structure parallels with a different type of space and location.

Two main items to consider, location and type of buildings.

For example, if you are leasing office space in the Tampa in a large building in Westshore or Downtown Tampa, nine times out of ten you have a Full Service office lease. Compared to if you are leasing office space in Carrollwood you would come across more Modified Gross or Full Services leases.

The type of building can also play a role but there are exceptions. If you relocate your office to a different type of building (from a multi-story office building to a single-story building) the kind of lease structure can vary.

What is the Difference between Full Service (FS), Modified Gross (MG) and Triple Net (NNN) Leases?

In commercial leases there are three typical types of leases that can be negotiated between a tenant and a landlord: “Full Service Gross” (FSG), “Modified Gross” (MG) and “Triple Net” (NNN). In some cities, one type of lease may be more prevalent than the others. In general, full service usually applies to a multiple story office building, MG single story office space or warehouse and NNN applies to retail space. Usually, the differences between the three lease types relates to how (and by whom) the “triple net” costs (taxes, insurance and common area maintenance (CAM)) are dealt with.

Full Service:

In an FS lease, the triple net costs and any additional costs such as utilities and janitorial, but excluding the costs of phone/data, are bundled into the base rent. FSG leases provide the tenant with the highest level of certainty regarding their complete occupancy cost; however, the downside is that the annual escalator will increase the base rate of the lease regardless of any real fluctuations in the operating expenses.

Modified Gross:

An MG lease typically includes all the triple net costs but excludes utilities and/or janitorial service. An MG lease has similar advantages/disadvantages to a FSG lease; i.e. taxes, insurance and CAM are typically bundled into the base lease rate. A unique disadvantage is that the tenant will have two additional variable costs to consider: utilities and janitorial. It is important to note that a modified gross lease can be “modified” to include or exclude any individual expense within the base rate “bundle.”

Triple Net:

In an NNN lease, the tenant is responsible for their pro-rated share of the “triple net costs”: taxes, insurance and CAM; in addition, the tenant is also responsible for utilities and janitorial. The primary advantage to an NNN lease is transparency; all of the building’s operating costs are available for the tenant’s review. The primary disadvantage is that the triple net costs are not guaranteed in the Lease and are subject to increase or decrease, increasing is much more typical.

 

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The #1 Most Under Utilized Employee Retention Tool

We sit down with CEOs when discussing their office space requirements and growth of their companies. One of the most common frustrations we hear is, “It’s difficult to find the right talent.” The local Tampa Bay economy has been flourishing the past few years and continues to do so.

High demand for good people puts the employees in the driver seat when job searching in the market. In fact, Hillsborough County’s average annual wage of $54,278 is the highest among all Florida counties, according to Enterprise Florida’s State of Florida 2018 Average Annual County Wage Data Report. Pair that with the lower cost of living in Tampa and it makes for a very attractive place to want to work.

But how do you stay competitive when there are other companies fighting for and marketing to your employees?

By thinking beyond the space-and-place mindset.

It is one thing to actually land amazing, qualified people for your office, but it is another all together to keep those employees on the payroll, at their own choosing, well past their first work-anniversary.

One-third. That is the estimated amount of a lifetime that an average person will spend at work. When you factor in commutes to and from the office, it quickly adds up just how much of an employee’s day is actually work-related.

A survey by Fidelity reveals millennials, which make up the largest population of our current workforce, will happily take lower pay for a healthier work life, research shows. Do you still think it’s enough just to hire the best and brightest for your company?

Not if you want to keep said employees.

Having a culture where they feel heard, to be innovative and work for a purpose and greater cause then just a paycheck. You need the right environment to be a conduit of this type of culture. Spend time before you sign a property agreement identifying the aspects of your company’s culture that need to be reflected in the office space.

  • Do you need an open floor plan? Or more formal, designated offices?
  • Do you need a large kitchen? Or a small break room?
  • Do you need a trendy, sleek exterior? Or a more traditional design and style?

By determining exactly what type of environment will best suit your employees before you lease office space positions you further along the road towards the happy land of employee retention far beyond the yellow brick road.

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Second and Third Quarter Office Space Market Indicators and Construction Updates

  • Unemployment rate in Tampa/Hillsborough County fell by 20 basis points (bps) over the past twelve months to 3.4%
  • Tampa Bay’s economy accelerated over the past year, adding 22,140 jobs for an annual growth rate of 2.0%.
  • Overall office vacancy rate in Tampa/Hillsborough County closed out the first half of 2019 at 12.8%, a 200 bps increase when compared to this time last year.
  • Tampa Bay leads the nation with one of the lowest cost of living

Second Quarter

Important Highlights

  • Class A rent increased approx. 2% a square foot, pushing the average rent across the market over $30.00 a square foot.

Let’s Talk Rent Numbers:

Submarket Overall Average Asking Rent All Classes Overall Asking Rent Class A
Westshore $33.11/sq. ft. $32.98/sq. ft.
Downtown Tampa $29.15/sq. ft. $32.67/sq. ft.
Northwest Tampa $22.25/sq. ft. $24.72/sq. ft.
South Tampa $29.60/sq. ft. N/A
i-75 Corridor $22.53/sq. ft. $25.18/sq. ft.
Southwest $19.28/sq. ft. $24.00/sq. ft.
Downtown St. Petersburg $27.23/sq. ft. $30.25/sq. ft.

Third Quarter:

Important Highlights:

  • 3rd quarter market rent increased by 3.4% per square foot full service rent
  • Central Business District and Westshore submarkets rose 3.1% to $32.77 and 10.7% to $35.99 per square foot
  • The CBD submarket has the most occupancy gains, which ended the third quarter at 10.1%
  • Westshore rent rose to its highest level ever rent price for submarket
  • 1.6 million square feet was leased within suburban markets holding the majority of the transactions
  • Westshore and some of the Suburban markets experienced large space back on the market with large Tenants such a Laser Spine and Coca-Cola moving out.

 Let’s Talk Rent Numbers:

Submarket Overall Average Asking Rent All Classes Overall Asking Rent Class A
Downtown Tampa $29.93/sq. ft. $32.77/sq. ft.
Westshore $31.03/sq. ft. $35.99/sq. ft.
South Tampa $31.00/sq. ft. N/A
i-75 Corridor $23.50/sq. ft. $24.56/sq. ft.
Southwest $19.20 N/A
Northwest Tampa $22.95/sq. ft. $25.14/sq. ft.
Downtown St. Petersburg $27.47/sq.ft. $30.30/sq. ft

Construction Highlights: More Cranes in the Skyline

The second quarter marked the most significant office construction in over a decade with approximately 1.4 million square feet under construction, marking the most office construction the market experienced since the second quarter of 2008.

  • The Central Business District (CBD) led with 825,000 sf under construction, the highest level since the early 1990’s.
  • Heights Union construction is underway with pre-leasing activity with a 75,000-sf lease to Axogen in the first building and a 50,000-sf lease by WeWork in the second building. Both buildings will be completed by mid-2020.
  • The 150,000 sf office portion of the mixed-used development Sparkman Wharf is slated for completion in mid-2020.
  • 1001 Water Street was underway, a 380,000-sf free-standing office building located in multi-billion dollar mixed-used project. It was the second office building under construction in the project, slated for mid-2021 completion.
  • Midtown One, an office building in a larger mixed-use project broke ground in the second quarter.
  • Phase One, slated to be completed before the 2021 Super Bowl in Tampa, will comprise retail, including a Whole Foods, a hotel, multi-family apartments, parking garages, and a 152,000-sf speculative office building.
  • Renaissance VII, a 115,000-sf build-to-suit for Wellcare in the Northwest submarket was completed

2019 4th Quarter Forecast:

The shortage of available space combined with business growth is expected to continue to drive vacancy down in the Class A and B space. Companies outside of Tampa Bay and around Florida and the country will continue to target Tampa Bay for as they identify cities to expand into because of Tampa Bay’s opportunity for small to large growing companies. Tenants may continue to leave Class A+ buildings as they experience sticker shock and into B buildings and other Sub-urban markets.

What does this mean for Tenants?

  • Construction costs on 10,000 square feet and less often see an overage in cost.
  • Parking in downtown Tampa still remains an issue with limited spots and cost is high.
  • Landlord usually offers an average of one half month of free rent each year of the lease term.
  • Usually, a five year lease receives an allowance for Tentant approved allowances, but does not cover the cost of the full build out. Most tenants pay to fund the rest of the cost, though owners will increase their contribution based on length of term and credit of tenant.
  • Limited options of under 5,000 square feet of sublease office space. If you think a short term lease is required as you building, options such as Industrious provide great flexible alternatives as you grow
  • Now is the time to have a Tenant Representative Broker advocating on your behalf. The market is dynamic, availability is quickly shifting and having a Broker who has their finger on the market pulse and long standing relationships with Brokers will get you the best terms possible.

What does this mean for Landlords?

  • Remaining in the driver seat as demand remains strong
  • Influx of companies outside of Tampa Bay will continue interest leasing space. Ensure proper financials and company information is scrutinized before signing a lease.
  • Due to economic growth, be cognizant of new residential, mortgage or lending companies with limited track record as they are usually impacted by market influx, ensuring low debt to income ratios when reviewing financials
  • Updating interior and exterior finishes for Class B and C buildings is wise to attract and remain competitive for Tenants who are considering leaving Class A+ space due to rent hikes

 

 

 

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Take A Closer Look at the Tampa Bay Office Space Market

“Florida continues to see strong, broad-based gains with employment up solidly. The Tampa Bay area remains one of the nation’s fastest growing major metropolitan areas.” Alexis Muellner, Tampa Bay Business Journal

First quarter of 2019 is now completed, what does that mean for the rest of the year? How you start the year sets the pace and can determine the rest of the year. What is the pulse of the Tampa Bay office is market and what do we see for the near future?

 

We hit a new record high in Quarter 1.

  • 159 people are moving to Tampa Bay every day
  • Continued economic growth by adding 26,200 jobs creating an annual growth rate of 1.9%.
  • Class A rents increased to by approx. 2.2%. The most substantial impact was due to 6.4% increase of Westshore and Downtown Tampa
  • Record highs for Class A office space in Westshore
  • Hillsborough County vacancy slightly increased compared to Q1 2018
  • Declining vacancies and dynamic Tenant demand is driving the higher rents and confidence from Landlords in Tampa Bay

 

Cranes in the Sky Signaling Strong Market Growth. There Tampa office market hit a new record the first quarter in 2019 office construction in over 10 years with 730,000 just behind 2008 when over 890,000 sf was under construction.

  • Significant projects in Tampa that broke grand.
  • Heights Union in Tampa Heights on two 150,000 sf buildings. The first building is estimated to be completed in early 2020.
  • Water Street project has been moving along with their 180,000 sf office portion at Sparkman Wharf.
  • MidTown Tampa, just North of Westshore with mixed office building, retail, apartments and hotel. The initial phase is estimated to be completed before the Super Bowl in 2021.

 

Let’s Talk Rent Numbers.

Average asking rent for Class A full service office space in Tampa Bay:

  • Westshore: $33.59/sq. ft.
  • Downtown Tampa: $32.50/sq. ft.
  • Northwest Tampa: $24.35/sq. ft.
  • Downtown St. Petersburg: $30.25/sq. ft.

 

2019 Forecast:

The market is estimated to continued rent growth in 2019.  Landlords remaining in the driver’s seat as supply continues to remain limited and Tenant demand is increasing.

What does this mean for Tenants?

  • Increase your estimated lead time when evaluating your office relocation
  • Continued vacancies decreasing while the Tenant demand remains steady, Landlords have the upper hand to increase rents through 2019.
  • Now is the time to have a Tenant Broker advocating on your behalf. The market is dynamic, availability of space is quickly shifting and having a Broker who has their finger on the market pulse and long standing relationships with Brokers will get you the best terms as possible

 

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Was 4th Quarter of 2018 the End of the Office Space Era?

Not the slightest. How is the Tampa Bay office market doing? Compared to Q4 of 2017, the overall vacancy rate for Hillsborough County office space has increased slightly to 11.9%. It should also be noted that overall new square footage under construction increased dramatically from 150,000 to 580,000, bringing over new 400,000 sq. ft. to the market. The average asking rent also increased from $24.88/sq.ft. to $26.07/sq. ft., with Westshore leading the way with the highest level of Class A asking rent noted in the history of Hillsborough County at $34.00/sq. ft.

Downtown Tampa and Westshore often teeter totter back and forth of for the top spot of highest rent in all submarkets with approx. 10% separating from the next submarket in the lineup.

Below is the average asking rent for Class A Full Service office space:

  • Westshore: $34.00/sq. ft.
  • Downtown Tampa: $32.50/sq. ft.
  • Northwest Tampa: $24.20/sq. ft.
  • Downtown St. Petersburg: $30.25/sq. ft.

As the year drew to an end, it should be noted that Class A space led the market with over 100,000 sq. ft. absorbed. Office space in the suburban market held the greatest ranking with almost 2.0 of the 2.4 million sq. ft. available leased. These statistics help us to see how the leasing aspect of the Tampa Bay market was robust and points to a healthy 2019 rate of leasing activity as well.

Forecast:

The market is estimated to continue the rent growth in the 2019 and starting 2020 level out and potentially increase as more available space comes is delivered to the market.

What does this mean for Tenants?

  • The market should continue to absorb positively in this next quarter.
  • With vacancies decreasing while the Tenant demand remains steady, Landlords have the upper hand to increase rents as we move into 2019.
  • Now is the time to have a Tenant Broker advocating on your behalf.The market is dynamic, availability of space is quickly shifting and having a Broker who has their finger on the market pulse and long standing relationships with Brokers will get you the best terms as possible.