Hovering over your office real estate lease is always one thing: the lease renewal. Unlike residential leases, landlords will approach commercial leasees with proposals months in advance of the renewal date. Like residential leases, the terms for the renewed lease include a common element: higher rates.
What most businesses don’t understand, however, is that their fate is entirely in their own hands. Companies don’t have to simply bite the bullet and accept the higher rent conditions; instead, with savvy negotiating tactics and a few tips, you can often find middle ground with your existing landlords – or hunt for new space until the lease expires. Here’s what you and your team should keep in mind when it comes time to negotiate a commercial real estate lease renewal with your current landlord:
1. Don’t Wait Until the Last Minute
If you’ve ever relocated offices, you know the stress and strain it can put on your people, let alone your day-to-day operations. Not only will moving offices require substantial planning to ensure your furniture, equipment, communications, infrastructure, and IT are seamlessly transferred, educating your employees on the changes to their commutes, workflow, and work environments are key to a successful move. That said, waiting until the last minute to finalize (or not) an office lease renewal serves no party effectively – including your landlord.
2. Proactively (and Continually) Research Your City’s Commercial Real Estate Market
No matter where you’re located, your city is likely experiencing a boom in modern, affordable commercial real estate development – and that’s good news for your negotiations. With so many new constructions coming online, it’s never been a better time to look into potential expansions or relocations to newer, more desirable office spaces (especially if you’re locating in fast-growing midwest cities like Phoenix, Indianapolis, Cincinnati, or Denver). Do your homework well before and during the negotiating period to find out more about your landlord’s competition – doing so can only serve your interests.
3. Consider Your Landlord’s Position
Unless you’re located in a highly competitive coastal market like New York, Seattle, or San Francisco (or have been grandfathered into below-market lease terms), it’s often in your current landlord’s best interests to keep you right where you are. However, that won’t stop them from trying to raise your rent during the renewal period. “Fair market value” is a term that many commercial real estate companies use to justify an increase, but doing your own independent research into your city’s market value is a valuable asset when it comes time to sit down and talk turkey with your landlord.
4. Assess Your Current Needs and Opportunities
Is your company growing steadily? Have profits increased year-over-year? Are your employees comfortable in their current workplace? These are all questions to consider when thinking about your options in an office space renewal negotiation. If your current space is suiting your needs adequately, it may not be in your best interests to consider another space. However, if you’re bursting at the seams or your current landlord can’t accommodate growth and expansion, maybe it’s time to look for greener grass.
5. Don’t Expect Loyalty (or Tenure) Will Buy You an Inch
One of the ugly realities of being a landlord in a commercial space is the renewal option, which gives the tenant right of first refusal on an extension of a previous lease agreement. That binds their ability to market the space to prospective tenants willing to pay a higher rate or a larger tenant in the building wishing to expand. Approaching your renewal agreement with the duration of your previous relationship, therefore, may not carry as much weight as you may hope.
6. Counteroffer – and Be Prepared for Theirs
As with most negotiations, one party makes an initial offer with the expectation that their terms be met with a counteroffer. With higher stakes deals such as long-term agreements for commercial real estate, the negotiation and proposal process may take several months, with both sides inching closer and closer to a suitable arrangement with each successive offer/counteroffer.
7. Hire a Tenant Rep Broker to Help You in the Process
If you and your company aren’t familiar with the commercial real estate market or rental negotiations (or you don’t have anyone in your company with the bandwidth to properly manage the process), bring on a tenant broker to represent your company and walk you through the process on a consistent basis. It’ll ease your headaches, save you time, and ensure the process results in a favorable outcome for your company.
However you decide to approach the lease renewal process, it’s important to understand current commercial real estate market conditions and investigate any availabilities in nearby spaces that may improve your company’s workplace and financial situation. The better prepared you and your team are to relocate, the better your position during the negotiation period will be.