he fifth year of the annual CRESA Partners Airport-Area Office-Warehouse Rental Rate Survey finds the market for properties near the top 20 U. S. air cargo airports looking healthier than at any time since we first published our findings in these pages in March 2001. But the 1 percent increase in the national average net rental rate this year, to $6.14 per square foot, must be seen in perspective.

Click to Enlarge

The increase is the first annual growth in our national measure after three years of decline, and it still leaves the rate 9 percent below the average net rental rate we calculated in 2001.

But we also find a market where construction is taking place and new lessors are standing by waiting for the right moment to move. It's a market, in other words, that is starting to grow and showing that it may grow at an even faster rate in the future.

First let's take a look at the data from this years survey and how it compares to surveys from prior years.

The national annual average net rental rate for 2005 of $6.14 is up from $6.05 in 2004. That followed rates of $6.26 in 2003, $6.32 in 2002 and $6.73 in 2001.

The most expensive airport areas, as has been the case in years past, were JFK, LAX, BOS, and SFO, and the least expensive cities were OAK, CVG, SDF, and MEM. Higher rates around IND pushed that city up to 13 from 19 primarily because the properties included in this year's survey were new and reflected development around that city's new Interstate 70 interchange near the airport.

Operating expenses, which are paid by tenants in addition to rent, continue to be a fairly major consideration when comparing alternative properties. These additional charges reimburse the landlord for such things as taxes, insurance, maintenance of common areas, management fees, snow removal.

It is not uncommon for operating expense to add another 15 percent to 25 percent to total leasing costs.

Our methodology for this years survey remained the same as in years past. For each city surveyed we identified three available properties that might be considered by a "typical" airport-oriented office/warehouse tenant, and we used the average of the asking net rental rates for those properties as the representative rental rate for each city.

The cities were then ranked from most to lease expensive, and operating expense data was also collected.

A "typical" tenant by our definition would be seeking a total of approximately 20,000 square feet with about 20 percent of the total area built out as office space. This tenant would have a need for dock high truck doors and would have a requirement to be within five miles of the airport.

None of the surveyed facilities were located on municipal-owned airport property, where rates tend to be dramatically higher. Also, exceptions to the five-mile proximity rule had to be made for MSP and DIA because of local development patterns.

The data was collected during late fourth quarter 2004 and early first quarter 2005 to provide a snapshot of year-end market conditions. Looking beyond the survey data, here are a couple of observations.

First, there is an enormous amount of capital available for investment in real estate right now.

Among colleagues in my home market of Atlanta and in other cities in which our company does business, this was a recurring theme: "there are lots of buyers out there."

Generally, there are two types of buyers for office/warehouse and other commercial properties: owner/users and investors. At the moment both groups seem to be actively looking to purchase properties. The owner/user buyers are motivated to buy partly because of interest rates that continue to be at historically low levels. Publicly traded companies that are space users are encouraged by stockholders and Wall Street analysts not to tie up capital in non-core assets, so virtually all owner/users buyers are privately held companies.

The owners of these privately-held companies want to purchase the buildings that are occupied by their businesses to diversify their personal financial portfolios. Their logic is easy to understand, given the sorry returns that have been provided by other assets in recent years. It's no surprise, then, that clients nearing the end of their lease term have been asking me. "Hey, can you find us something to BUY?"

There is also no shortage of investors who are looking to buy income-generating properties.

These investors are mostly Real Estate Investment Trusts - publicly-traded companies whose sole purpose is owning real estate - pension funds, and entrepreneurial buyers. Capitalization or "cap" rates have fallen in recent years, partly a reflection of the competition among these investors as they all seek to purchase assets.

This "feeding frenzy" to purchase properties is in dramatic contrast to the leasing market, which brings me to my next point.

Tenants in this slow market will be rewarded for planning ahead.

Around the country, the most common comment about leasing activity was some variation of "not much momentum."

As a tenant in the market for space to lease, companies have more leverage when they have more options, and they have more options when they have more time. Tenants who get started searching early will be rewarded with more favorable lease terms, especially in this market.

For instance, in one recent case, my client was a large international freight forwarders and the decision-making executive is a very astute veteran of the industry. With the client's support, I initiated our space search more than nine months ahead of the client's lease expiration date. The initial property tour included 12 alternatives; this group was short-listed down to three property owners from whom we solicited proposals.

As is common, the company decision maker's attention shifted back and forth between running his business and addressing the property issue. During quiet times when the client's attention was focused on business, a landlord whose property had been eliminated from the competition would submit a (unsolicited) revised proposal with very attractive terms. The client's focus would again shift back to the property issue and we'd again consider the options, which now included the revised proposal. Again, we'd again cut the list.

The client ended up with significant concessions and an overall economic package that was over 25 percent better than the initial offers. This would not have been possible if the client had been under time pressure because of impending lease expiration.

The marketplace rewarded him richly for his willingness to plan ahead.

There is a lot of uncertainty in the economy right now, and I'm not saying it's easy to have the confidence in this environment to plan ahead in order to get a great lease deal. I'm only saying that it's necessary.

Ed Riggins is Executive Vice President in the Atlanta office of CRESA Partners, an international corporate real estate advisory firm. He can be reached at eriggins@cresapartners.com