Three Key Principles for Office Tenants to Maximize Leverage in Lease Negotiations
There is no question that economic conditions over the last 18-24 months rapidly shifted the office market from a pro-landlord to a tenant friendly market situation. The degree of this shift varies from market to market. How long this lasts will depend on the pace of the economic recovery and local market dynamics. However, no matter the condition of the market, there are three key things an office tenant can do to enhance leverage in lease negotiations.
Maximize Competition: While this seems obvious, tenants many times fail to maximize the competition for their tenancy among landlords particularly in lease renewal scenarios. If you are in the market for a Mercedes doesn’t it benefit the dynamics of the negotiation if the salesperson knows you have visited the BMW, Lexus and maybe even the Ford dealership? The landlord and the buildings leasing agent may very well know you they have a legitimate shot of landing your lease whether it is a renewal or re-location, but the perception you are exhaustively considering all viable market options casts enough fear that a competitive landlord will put a leasing package on the table you can’t ignore forces them to bring their best deal to the table.
Timing: The longer you have to evaluate the market, solicit proposals and structure a potential transaction is typically to the tenant’s advantage. In most cases the renewal or extension of your existing lease is a viable option, but if you approach your existing building owner too close to your lease expiration date that landlord is going to perceive the probability of retaining your tenancy is higher. There also is additional psychology at play in this tactic. The more time and energy the building owner’s leasing team has invested in the process, the more committed they are and likely to advocate to the landlord’s decision maker to do what it takes to make the deal.
The amount of time you should take to go through the process will depend on market conditions and the size of your space requirement. A 3,000 square foot tenant can certainly implement the process quicker than a 300,000 square foot tenant. No matter what your size, Landlords need to perceive you have time to properly evaluate the market, negotiate, design and build-out a new space. In a tighter market larger companies with fewer space options may need to introduce a build-to-suit or development scenario into the equation.
Retain a Broker: The mere presence of a qualified and respected tenant representative will typically improve the terms of the deal offered. Landlords and their leasing agents know if you are represented by an experienced real estate professional who specializes in representing tenants that:
- You are going to see all viable options in the marketplace and this can include alternate and less expensive submarkets.
- Your broker has the experience and skill to create leverage, position the negotiations and structure the most attractive terms from various Landlords. They will know which Landlords are being the most aggressive in terms of courting new tenants and how to extract the most beneficial proposals.
Hire a tenant representative and you will get to the bottom line much quicker and posturing tactics by various Landlords will be neutralized.