By John Jarvis
Something happened recently that we couldn’t ignore. Two of our advisors, John Jarvis, managing director in San Diego, and Jack Riazzi, senior vice president in Charlotte, sat down within weeks of each other and independently wrote nearly the same warning to tenants. They never compared notes. They landed on nearly the same title. That kind of coincidence tells you how strongly we feel about this, because it’s the thing we see every day and can’t stop talking about: the information gap between landlords and the companies who lease from them. In this piece, John takes the mechanics. The levers buried inside a lease that quietly decide what a deal really costs, long after everyone has stopped arguing about the rate. Jack’s companion piece takes the other half, the psychology of what your landlord already knows about you. Same table, two coasts.
Overcoming information asymmetry in commercial lease negotiations
Imagine sitting down to a poker table when the dealer shuffles the cards, cuts the deck and deals…except their cards are all face down and yours are all face up. Yep. This is what most tenants experience when negotiating building leases opposite institutional property owners. It’s the age-old problem of information asymmetry. At the risk of stating the obvious, it makes it kind of hard to bluff. So how does this happen? And how do we fix it? Let’s dig in.
They Know What Every Tenant in Your Building Is Paying
Your landlord is a party to every other lease in your building. Every tenant, every rate, every concession, every package of free rent, moving allowance and tenant improvement dollars. They know what the accounting firm on the third floor pays per square foot. They know what they had to give to win the three-floor tech company on seven, eight and nine. They know it all, from the tenant who was well represented by a seasoned tenant-side advisor, to the tenant who tried to go it alone and left massive dollars on the table.
They Know You’re Not Going Anywhere
It’s not surprising that the landlord’s property manager has a great relationship with your office manager. The property manager’s just doing their job. Those two talk all the time. Very cordial. Very friendly. And when your office manager, being friendly in return and making small talk, volunteers that your team does love the building and really does not want to move, of course that information finds its way to the building owner’s leasing team.
And let’s talk about that darn carpet. Your team just spent $95,000 on new carpet! You don’t do that if you are planning to move. Of course, the landlord is paying attention, and the carpet refresh is a tell. It’s a clear sign that you’re comfortable, that you’re settled and that you’re not going anywhere anytime soon. In other words, they know the cards you’re holding.
None of this happens by accident. Institutional landlords are sophisticated operators. Cultivating soft intelligence about tenant satisfaction and switching costs is part of how they manage their buildings and their investment. By the time you sit down to negotiate, they already have a very good sense of how things are going to play out.
They Also Know How Low They Can (And Can’t) Go
Behind every lease negotiation is a proforma, a financial model that tells the landlord precisely what the deal needs to look like in order to deliver the net effective rents that allow them to deliver on their proforma (aka promised) returns to their investors and their lender. They know their bottom line. And even if the market has declined below their proforma threshold, they can’t and they won’t.
And They Know That They Have a Problem
Yep, the landlord has a problem that you don’t know about. You see, they have a loan, with a balloon payment due at loan maturity, and it’s just a few months away. If you’re 2,000 square feet, maybe your lease doesn’t move the needle. But if you’re 20,000 square feet? Maybe it does. And if you’re 200,000 square feet? Your lease could be the difference between delivering those promised returns for their investors and delivering a deed in lieu of foreclosure.
So How to Even the Odds
You don’t have to play blind. The information asymmetry is real, but it’s not insurmountable. A strong tenant advocate or tenant-side advisor knows how the game is played and can help you to close the information gap. Just like the landlord, a top-tier tenant advisor does a large volume of business on the tenant side. They know what other tenants are paying, both the renewal tenants and the highly sought-after tenants that are signing new leases for the largest vacant spaces. They know how to run the landlord’s math. They know the landlord’s proforma targets, the concessions they’ve made in the past and the additional concessions they can afford to give away today.
Most importantly, they know how to coach you and your team to approach every project with an open mind and to consider what you would do differently in a new building if you did relocate. In other words, they know how to lead a process, because it is never just a lease renewal. A good tenant-side advisor who has worked transactions for years will know this first-hand.
When negotiating opposite your institutional landlord, you don’t have to simply play the cards you are dealt. Before you engage, take the time to hire an experienced and qualified tenant representative, someone who has experience as a tenant and buyer-side advisor, someone who has a long history in commercial lease negotiations as a tenant advocate, someone who can make you as smart (or smarter) than the property owners on the other side of the table. Once you’ve done that, with a strong advocate in your corner, you’ll be in a position to shuffle up and deal.
