The commercial real estate market is the softest it has been in decades. For companies that occupy office, industrial or lab space, these conditions only cycle in about once a decade, so it’s the right time to be proactive about your lease even if you have a year or more left. Across nearly every market in the country, there is far more available space than landlords care to admit, and the terms tenants can negotiate right now are the best we have seen in a generation. The companies that come out ahead are the ones that start early and keep their options open.
The Market Is Weaker Than the Headlines Suggest
Most reporting tracks vacancy, which only counts space sitting physically empty. It leaves out hundreds of millions of square feet of space that companies have listed for sublease, excludes buildings under construction, and also excludes space for lease that is not quite vacant yet. Add that back in, and the real supply competing for your tenancy is far larger than the published figures, as much as 25% to 35% more. Landlords understand this, while tenants do not, which is why so many business owners and management teams underestimate how much room they have to negotiate.
Landlords Are Propping Up Asking Rents With Concessions
Rather than cut the rent that gets reported to lenders and the market, landlords are giving value back in quieter ways: months of free rent, generous allowances to build out or improve the space, and even cash allowances toward the cost of moving. The headline rate stays high to protect the building’s value on paper while the real effective cost of occupancy drops well below it. A tenant who knows what to ask for can capture that gap. A tenant negotiating alone often does not know it exists, or even what a good deal looks like, as they have nothing to measure it against.
Why Starting Early Matters
Often, tenants’ instinct when expiration is a year or two out is to wait, and then call the landlord about a renewal proposal when the date gets close, or when their renewal option window opens. But the moment your landlord believes your desire and intention are to renew, your leverage evaporates, if you even had any before, given you were not in the market getting knowledgeable about your choices. A landlord who thinks you are seriously considering other buildings is now on their heels and has to compete with the open market. In today’s market, a new competing landlord will often work harder and be more aggressive to win your business than your current one will to keep it.
Turning that leverage into a better deal takes time and preparation, mostly done by a competent tenant representation advisor. Touring alternatives, running numbers on staying versus relocating or buying, and letting landlords compete for you all take months to do properly. If you begin six months before expiration, you are negotiating against your own deadline as you don’t have time to do permitted tenant improvements or execute on a complex move. Begin a year or two ahead, and renewing becomes one option among several, rather than the only move left.
The Conditions Are Not About to Disappear
In the recent tighter markets of the past, landlords would typically not want to engage in renewal discussions more than a year in advance, often believing that future rents a year or two out would be higher, so they did not want to lock in early. Those days are gone, as most building owners in most markets are very aware that this bottom we are hitting for commercial space will likely last some years. While this market has reset as tenants often need less office space, and industrial and lab space face overbuilding, conditions are likely to favor tenants for years to come rather than quarters. What shifts over time is your own standing with your landlord. The closer you get to expiration without a plan, the weaker that standing becomes, no matter how favorable the market is.
A short conversation well ahead of your date is what distinguishes reacting to an expiration from using it to your advantage. Hughes Marino works for tenants of commercial space, and not landlords, so every negotiation we lead and number we run is built around your bottom line.
