Tenants’ Market Causes ‘Flight to Value’

by | 18 May 2015

Although the ubiquitous phrase “Flight to Quality” holds true in oversupplied markets, it doesn’t accurately reflect what the majority of tenants are fleeing to.

Flight to Quality (FTQ) is a phrase that may top the list of overused real estate terms, but it still gets a lot of air time. That’s because nobody has come up with a more succinct way to describe what happens when a flagging market offers tenants an opportunity to upgrade their work space at rents they didn’t think possible. The general state of the economy and competitive business climate also command that they do so in order to recruit the best talent and provide a work environment where they can thrive.

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Note that Investopedia defines Flight to Quality as the “action of investors moving their capital away from riskier investments to the safest possible investment vehicles.” However, the phrase has attached itself to a broader range of activity, including tenants’ trading up to better quality locations, buildings and spaces.

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But that’s where the action of tenants’ upgrading their space shouldn’t be painted with the broad brush of FTQ. Chasing space in the highest quality buildings, especially the new trophy-quality space, is too expensive for the vast majority of tenants, given size and budget. Consequently, tenants look for a combination of quality and price. This is summed up as Flight to Value.

What does Flight to Value mean for property owners? To state the obvious: If you’re trying to buy assets or reposition existing ones (whether Class A or B), paying attention to what tenants want — and hopefully giving them a little more than expected — is the best guide as to where to invest and/or make capital improvements.

In submarkets facing sustained double-digit vacancies, where some are facing 20 percent or higher vacancy, expect that significant economic concessions will continue to be part of the valuewhether you are trying to attract new tenants or retain existing ones.

As to the former, everyone knows the act of flight is not without great cost. Sure, moving costs and the captivity factor are always taken into account when a landlord is negotiating with a tenant who is threatening to leave. But in an oversupplied market with so many alternatives to choose from, if your tenants can’t see a compelling degree of value in choice to stay put, they will take flight.

Steve is Senior Vice President of Colliers International in Washington, D.C. Having worked for both owners and occupiers, he writes about regional and national business trends. In his spare time, Steve is an accomplished cook and is also putting the finishing touches on his first movie screenplay. Connect with Steve on LinkedIn.