Chages to accounting standards will affect office leases

The Financial Accounting Standards Board, which sets American standards on accounting practices, is mulling over proposed changes to its generally accepted accounting practices (GAAP) regarding the recording of office leases.  The changes would require companies to book leases as assets and liabilities on their balance sheets, a move that will have the effect of making rent more expensive.  Office leases will be booked as a long term liability, with the entire lease on the books from day one, and the right to use the space as an asset.  This added liability will reduce the operating cash that companies have available and could potentially weaken an already struggling economy.  The new rules wouldn’t go into effect until 2013  but may be completed in 2012.  Read the post below:

http://www.costar.com/News/Article/Decision-On-Lease-Accounting-Rule-Changes-Likely-Pushed-Back-Until-2012/131352?ref=100&iid=245&cid=6707B0B5885DE2993BAB818312B089DC

CoStar Report

Mid Year Office Leasing Report

CoStar released its Mid Year Office Leasing Report today and you can find it here.  Among its conclusions were that despite 1) slower than expected job growth, 2) concern about the U.S. debt-ceiling crisis and 3) the European debt crisis, the office leasing market continues to make improvements.  While this seems counter-intuitive, given that the unemployment rate still stands at 9.2%, they cite businesses “gradually add(ing) workers and absorb(ing) space” as contributing factors.

Their data shows tenants “trading up” spaces in the down market.  With the price of Class A space 10% lower than in 2008, many businesses are taking this opportunity to improve their image.  This is reflected in an uptick in vacancy of Class B buildings. 

The report goes on to conclude that if companies start expanding again, office rents may start increasing ahead of demand growth.  These speculative increases in rental rates would reflect landlord’s hope that the lack of new development (of office space) will support the higher rates, despite the data from the New York market which shows that an increase in rental rates (7.3%) resulted in negative absorption (of space) around 1 million square feet. 

Another conclusion that landlords probably aren’t thrilled about is that the number of square feet per employee is dropping precipitously.  From 2003-2008, for each new employee added, companies increased their office footprint by approximately 233 sq ft.  Reflecting changes in the way offices operate–including “hoteling”–this number is now just 88 sq ft.  

If you have any questions on this report or how it translates into negotiable information,  contact me at stuart@byobroker.com.