By Alex Musetti
Business leaders across the country are cautiously observing one of the tightest industrial real estate markets on record with vacancies as low as 1.7% in some submarkets per our most recent Industrial Market Report. Relocation options are scarce and it seems like every week there is a record breaking rental price published above asking much to the investment community’s jubilee. On top of that, companies are facing unprecedented challenges from various areas—supply chain disruptions, inventory overflow needs, labor shortages and some of the highest rental rates for industrial facilities ever seen. During these times an effective tenant representation broker—an advisor who can act confidentially, delivering the in-house tools and services necessary with zero conflicts of interest—is worth their weight in gold.
Defining a real estate and/or negotiation strategy requires some planning. Far too many companies end up renewing their leases under terribly unfavorable terms. Not only does this pose a problem for the tenant, but it also exacerbates the larger problem of rising rents. This is almost always the case when the company elects to work with a landlord directly on their negotiations or, worse yet, agrees to work with a dual agent—a landlord representative whose sole purpose is to negotiate favorable rent or terms for the ownership.
Usually this starts with a seemingly innocent act of reaching out to the landlord to signal their willingness to renew their lease, and better understand what those terms might look like. While this may seem harmless, the sheer act of communicating directly with the landlord on this subject puts the tenant at an early disadvantage. In doing this, the tenant is effectively telling the landlord that they do not know what a fair deal is, that they want to stay in the building, and have yet to educate themselves on market conditions. Without any representation, market intel, thorough review of the existing lease provisions or even a rudimentary understanding of their options in the market, tenants are walking into the landlord’s den completely unprepared, and largely at their mercy.
Rather, the communication should go through an engaged broker representative who is free of any conflicts of interest, and who is prepared to execute on the real estate strategy as defined with and by the tenant. When such an approach is taken, the landlord will know that they are working with a tenant that is informed, nimble and focused. From there, the parties can begin working towards a solution that addresses the needs and wants of the tenant, while navigating the real market requirements of a tight market.
So, what does a real estate strategy look like in such a tight market? What real leverage is there when the options to relocate are so few? Here are a handful of giveaway questions executives and their broker should discuss as they begin to think about their real estate needs, and how those needs might fold into an improved lease renewal moving forward.
1. Is the facility suitable for your needs?
Maybe you need some more space but relocating is costly. Perhaps opening a satellite office is a solution. Can you negotiate an upgrade to the sprinkler system so you can get that high-pile permit and make use of the ceiling height in the warehouse? On the other hand, if the space you have is too large, you might find that being in a tight market works to your advantage—you can always sublease the extra space, often at a profit.
2. If you absolutely had to move, what would that look like?
The cost, and the task, may seem daunting but having this rough idea in mind is helpful as a backstop.
3. Are we thinking long term or short term?
If we are confident in where the business will be in seven years, then we should be talking about a seven-to-ten-year plan. If that’s the case, we can discuss long-term strategies like build-to-suit options, or long-term leases to lock in a low rate and take advantage of increased improvement allowances.
4. Is there any deferred maintenance to note?
The most common culprit is a set of HVAC units that will need to be replaced in the next five years. Poorly drafted leases have those costs falling to the tenant and it is not advisable that a tenant agree to bear the full cost of replacing HVAC units in the building. A lease renewal is the exact time to revise that lease language to put that responsibility squarely on the landlord.
5. What is the landlord’s exposure if they lose me as a tenant?
They’ll likely have downtime on the space. They’ll have increased closing costs when they do re-lease it. They’ll have to perform some tenant improvements to the premises for a new tenant. And on and on. A qualified industrial tenant representation broker will automatically quantify these costs so that we can back into the landlord’s exposure if we were to leave.
Executing on a successful negotiation starts with having a thorough real estate strategy. The first step in defining that strategy is a discussion around the business, its needs, the market, and the facility. Sitting down with a trusted broker who is free of any conflicts of interest is the best way to begin. Many companies do not realize that our expert tenant representation services will not cost them a dime. In no way does our involvement increase the cost of the transaction, and we do not invoice our clients for our fees. There always has been, and always will be, one type of customer for Hughes Marino—the tenants and buyers of commercial real estate. Our only fiduciary duty is to the business owners, companies, and organizations that we are proud to call our clients, and we take protecting their rights and bottom line very seriously. It’s a win-win for any company who decides to work with us.
Alex Musetti is a senior vice president of Hughes Marino, a global corporate real estate advisory firm that exclusively represents tenants and buyers. Contact Alex at 1-844-662-6635 or email@example.com to learn more.