Experts say that landlords will work harder to get commercial tenants than they will to keep them, because they view current tenants as captive quantities for which improvements and discounts are not necessary. For this reason, it’s important that tenants remain “competitive” in their lease agreements. This is accomplished by knowing how the space and facility can be improved, and knowing when those improvements are being withheld to benefit the next tenant in line. It also means keeping an eye on the market and looking at lease renewals as an opportunity to move into (or negotiate) a better deal rather than an operational burden that needs to be satisfied. For more on this continue reading the following article from National Real Estate Investor.
When you look at lease comps for a particular building, one consistent pattern invariably exists – renewing tenants don’t achieve the same deal that new tenants receive. Tenants often believe that because they are good, rent-paying tenants, their landlord surely wants to keep them on favorable terms.
Many tenants don’t realize that landlords view renewing tenants as captive, and already have factored a high renewal probability on favorable terms for the landlord into their pro formas. Tenants can avoid this discrepancy by taking steps to make their landlord compete to keep their tenancy.
Landlords know that a tenant’s business is not real estate, and therefore cannot afford to be engrossed in protracted negotiations. When a landlord is able to speak directly to an unrepresented tenant, the landlord knows that it’s best to sound accommodating to placate the tenant and to keep the tenant from seeking representation.
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The landlord will typically offer token discounts, while keeping key lease protections, important facility improvements and other market concessions out of sight and out of mind. Even if such terms were cited by the unrepresented tenant, the landlord knows that the more time a tenant spends on a negotiation, the less time a tenant has to focus on its business.
To make the landlord compete and agree to provide the tenant with the best terms possible, the tenant must demonstrate that it’s not captive by its actions, not just its words. It’s important to not only have adequate tenant representation, but also implement the right process that demonstrates that the tenant is effectively a free agent.
It starts by understanding how the space efficiency, layout and facility can be improved. It continues by evaluating the market, facilities and landlords pursuant to the tenant’s needs, and having those needs successfully negotiated elsewhere to compel the existing landlord to renegotiate them for the tenant.
Tenants must demonstrate negotiation leverage to avoid leaving money on the table and taking undue risk. Tenants should view a lease expiration or termination option within the next few years as an opportunity, and not as an inconvenient operational task, to do right by their organization.
By breaking through the inertia, tenants can ensure a win-win scenario for both parties, instead of a one-sided windfall for the landlord.
Mike Norris, LEED AP, heads the healthcare tenant-representation group as a vice president with The Washington, D.C.-based Ezra Company, a commercial real estate firms that exclusively represents tenants.
