Renewing an office lease is time consuming and interferes with the ability to conduct business. Many companies renew their lease simply because it reduces the chaos of disruption and preserves stability of operations. The perception is that it is much simpler to negotiate a renewal.
Renewing the lease is the best alternative if the square footage requirements are the same, the space functions well and the geography, aesthetics and amenities all fit within the companies needs.
A tenant should expect a transaction that is at least in line with the market. This includes concessions that would be offered to new incoming tenants such as rate, free rent, tenant improvements, operating expense exclusions etc.
The proven way to negotiate an aggressive lease renewal is to leverage multiple office space opportunities against each other. You have to make sure the landlord knows you are not a captive tenant when considering renewing versus relocating.
Landlords Position From Tenant Reps Perspective
A renewal transaction is actually a premium to the landlord based on the presumption that they will not have to spend the money related to obtaining a new tenant which would include the operating expenses and debt during the marketing period, tenant improvements, and marketing costs.
Landlord Focus
A landlord's business is real estate He conducts real estate transactions daily and is an expert in the negotiating process. He knows exactly what is needed to increase return on investment. The focus remains in maximizing revenue and minimizing expenses. Without appropriate pressure the landlord has little incentive to compromise to a tenant's need to improve the transaction.
Tenant Focus
A tenant's business is not real estate in most cases. The goal however is essentially the same. Maximize revenue and minimize expenses. Employees are the biggest expense to an employer with rent being the next highest operating expense. A tenant only conducts the real estate process once every five or ten years on average.
The tenant requires a strategy that evens the playing field with his landlord.
Process
The initial step a tenant must take is to have a process in place. this process can take just as much time and effort as the original lease negotiation. Only when the landlord believes that there is a high probability of losing his existing tenant will he begin to make meaningful concessions.
A tenants intent is established by a readiness to think about alternative buildings. The tenant needs to be willing to take the necessary steps in negotiating an alternative lease while concurrently negotiating the renewal. Both must be real in order to have an impact. Many times in my experience the tenant ultimately decides to relocate once they realize how aggressive some landlords are actually willing to be.
Time is the most critical component of the renewal strategy. Landlords know exactly how long the lease acquisition process takes. The average time needed is twelve months prior to lease expiration and can vary depending upon the size and complexity of the transaction.
Getting out and actually viewing what the competition has to offer will not only help you understand the market but also convey intent which will in time get back to your current landlord.
Commercial real estate brokers have weekly meetings with landlords to discuss market activity. They also share this information with other brokers and landlords.
Negotiations require leverage in order to be successful. This is done by creating competition in the marketplace among the various landlords. The only way to measure this is to negotiate multiple proposals concurrently.
Landlords want to acquire as much knowledge as possible over a tenants negotiations. The landlord will call you. Inform them that the you are considering your leasing alternatives and will make the best decision based on all available information provided by your tenant rep. All communication with the landlord should be done through the tenant rep so nothing is lost in the details.
The biggest mistake you can make is to tell the landlord that you want to renew your lease. Tell the landlord that you are considering renewing your lease and leave it at that. Keep the discussion at a distance. Negotiating is a game and there is no point in giving the landlord an upper hand.
Many landlords tell tenants that they can expect to pay a higher rental rate if a broker is involved in the lease renewal transaction but they can avoid that if they simply negotiate the lease directly.
The commission is a negligible amount. If your tenant rep does not have a proven track record of saving his clients many thousands of dollars more than the commission, you should think twice about hiring him or her.
Quality landlords understand the value that a reputable tenant rep brings to the table. In that regard, most landlords will gladly compensate a tenant rep if it means not losing the tenant. Commissions are the landlord's cost of doing business.
Keep in mind, it's more expensive to find a new tenant then to retain an existing one.
