Due to the current economic climate and withering demand from office tenants, landlords are seeing vacancies in their buildings skyrocket. Many tenants are downsizing, moving out and closing their doors. Moreover, since most landlords' operating income has taken a hit, refinancing options are scarce, which may further jeopardize the ownership of buildings with maturing or adjustable rate loans. These conditions should give tenants the distinct upper hand in negotiations with landlords, but when it comes to lease renewals, landlords are still stacking the deck. Here are some helpful tips to increase your odds of negotiating a successful lease renewal:
Quantify, quantify, quantify
Data is essential when considering a renewal. How vacant is your building? How much are other tenants paying? Are any other tenants downsizing? If you don't know what tenants next door are paying, how will you know if you're being offered renewal terms 20 percent higher? Talk to real estate professionals, neighboring tenants or others in your network. This is one of the most important decisions to your company's bottom line; don't leave it to chance or gut feelings.
Leverage from thin air
The process of renewing a lease is the same as relocating. Even if you intend to stay in your space for the next 20 years, make sure to tour the market and request proposals from other buildings to ensure that your landlord knows that you are seriously considering a move and that he or she needs to compete for your tenancy. In creating this negotiating leverage, you may end up finding an opportunity that better suits your business.
Don't show your hand
No one outside your real estate department or management team should know your intentions regarding your office space occupancy. Landlords have a team of people who are responsible for keeping their ears to the ground regarding your decisions — brokers, asset managers, property managers and even day porters. For example, if your receptionist has proprietary information and tells the property manager in passing, “Oh, we're not going anywhere,” any negotiating leverage you've built has been dissolved.
Address it early
While some may think that 6 months is enough time to renegotiate their lease even if they intend to stay in a building, in terms of lease negotiations, it is much too short of a time line to realistically relocate and, therefore, tips the landlord to your intent to stay put. To retain the utmost flexibility, tenants should begin mulling decisions about their space at least 12 to 18 months prior to expiration. This allows the tenant to not only explore other options, but also to capitalize on any current vacancy dilemmas the landlord may be facing, which may result in lower rents and more flexible options.
Don't get caught without representation
Landlords rely heavily on their brokers to keep their buildings full no matter the cost to the tenants. Shouldn't you have someone working on your behalf to level the playing field? A tenant broker can be extremely helpful with not only providing vital market information, but also in creating the negotiating leverage necessary to convince the landlord that you’re serious about relocating if you can’t come to reasonable terms on a renewal. A tenant who contacts his landlord directly to express a desire to renew a lease is essentially showing his cards and telling the landlord he doesn’t need to compete for the tenant’s occupancy.
— T.D. Rolf is a vice president and co-branch manager at Studley in San Diego.