By Gavin Curtis
“Should I stay, or should I go?” There is perhaps no question asked more often by tenants.
There may be a need to increase headcount, upgrade the current layout or in some cases, reduce the footprint to provide greater efficiency and productivity for the organization.
In each instance though, the number one message for tenants is that they have options, and that a lease renewal is not a done deal.
The bottom line is that tenants have much more leverage than they think. The reality is that landlords are avoiding risk when they can sign a tenant renewal.
A landlord facing a tenant who is leaving their property will undoubtedly experience extensive (and expensive) downtime between one renter’s vacancy and the next occupant’s lease start. This adds marketing and advertising expenses, and improvement costs to the space. These costs are significant, which help to create leverage for tenants considering a lease renewal.
Let’s face it, a brand-new tenant is not going to sign a lease for a space “as-is.” The landlord will need to invest significant capital and modify or enhance the space to meet the needs of the tenant. With construction costs at an all-time high (even after accounting for inflation) it’s costly for landlords to do this. This is what ultimately gives tenants an unexpected advantage in the negotiation process. This leverage, coupled with an informed, honest and trusted tenant representative, sets any business tenant up for success to find the perfect space that fits their needs and budget.
In the current environment, business owners may not feel they have an edge in negotiations. Vacancy rates are at all-time lows, rental rates and sale prices post all-time highs and construction costs stand greater than ever. This is certainly why approximately 80 percent of tenants end up renewing their existing lease. At Hughes Marino, a tenant’s current situation is not a default position, but rather the starting point for finding clients the best possible outcome for their business, team and culture.
It is critical for business owners to understand how highly sophisticated, astute and financially savvy commercial landlords are, and even more critical to have a trusted broker with the tenant’s best interests in mind. We indisputably believe that a tenant renewing a lease will never pay the full asking rate…period. In order to secure favorable terms, tenants must sit at the table with a competitive posture, armed with the knowledge and insight necessary for shrewd negotiation.
There are a myriad of variables that tenants should consider when eyeing a renewal or relocation. Typically, a business owner with a renewal clause should never consider exercising that option prior to 9-12 months before lease expiration. Our tenant representatives tour clients through multiple properties, vetting space options, amenities, terms and rates, keeping them informed on every aspect during their search—even if they ultimately decide to move forward with a lease renewal. We strongly believe a client should always carry options with them as they pursue a renewal, as landlords will be ready with analytics and their property specific metrics. A renewal conversation always begins with a declaration notice to the property owner that our client is informed. Tenants who enter a transaction dialogue without market intelligence are asking for an uneven deal.
Substantive due diligence offers the foundation for a successful transaction. Consider a tenant who has 18 months remaining on their lease and occupies a 15 percent vacant building with two large profile tenants, both which have leases expiring in 24-36 months. Such a scenario could spell opportunity for that tenant. Our team knows the numbers, the stakeholder situations and calculates the points of indifference for the landlord.
An asking rate of $50 annual per square foot for a renewal may finalize at $43 per square foot when a negotiation proceeds under a thoughtful strategic architecture. A tenant certainly considers moving costs, time and tenant allowances in a move however, a main bargaining point, the landlord’s goal is stabilizing the building’s cash flow.
The days of pounding a fist on the table and threatening landlords with a threat to move across the street are long gone. In brokerage, empty threats ultimately lead to tenant losses. Hughes Marino leads the industry in tenant representation and service, because our teams quantify the costs for the landlord of a move, as well as the costs for the business owner.
In the current business climate, landlords are eyeing long-term leases. Every business case is unique and requires a custom approach, which is why Hughes Marino delivers best-in-class tenant offerings to our clients. When negotiating with a landlord, it is imperative tenants go in with information quantifying the value they bring to the building. Quantifying a tenant’s value to the landlord’s net operating income is one of the best ways to build leverage in a renewal scenario.
Gavin Curtis is senior vice president at Hughes Marino, an award-winning commercial real estate company with offices across the nation. Contact Gavin at 1-844-662-6635 or firstname.lastname@example.org to learn more.