The Renewal Process: Five Common Mistakes Occupiers Make
Renewals: What’s Next?
Lease renewals hold plenty of cost saving opportunities hidden underneath all of the dense wording and complex terms typically found in a lease contract. The ideal renewal negotiation will save your business money, modify key lease terms in your favor, make upgrades to your space and improve your overall business performance. But when occupiers negotiate without proper market knowledge or real estate advisors at their side, these opportunities are often lost.
We’ve identified five common and costly missteps businesses make during the renewal process. Isolated, these errors may have minor impacts on your transaction, but in combination, the toll on your bottom line could be enormous.
At first blush, the renewal option may seem the most practical, but this could end up costing your business more in the long run. Because market swings cause the commercial real estate (“CRE”) landscape to fluctuate, it’s difficult to quantify the cost of relocating vs. renewing. With the help of an experienced CRE professional, you’ll have a better understanding of market competition and receive a full economic analysis of your viable options, two factors that will guide you in making an educated, comparative assessment.
Remember this important rule: Competition creates negotiation leverage. The more landlord suitors you have, the better; it’s one reason why timing is critical. Condensed project schedules exclude long lead-time solutions—like build-to-suits or existing building retrofits—that could severely limit your options. By starting the process well ahead of your lease expiration, you ensure you have time to explore every feasible option available. This means your landlord has to negotiate within the confines of the market to retain you.
Under Valuing the Landlord’s Risk
In an effort to convince your business to stay in its current space, landlords and their representatives will often steer the conversation towards the costs associated with a relocation. What they won’t mention is how unfavorable your potential relocation can be for them. Beyond the loss of the income stream from your tenancy, landlords will have to consider their debt service, operating expenses and taxes, marketing costs to backfill the vacant space and improvements required to secure new occupiers. Prolonged vacancies can total up to millions of dollars in expenses and lost revenue. Understanding what’s at stake for a landlord is key component during renewal negotiations and something an experienced occupier representative can help you leverage.
Underestimating the Stacked Odds
Market knowledge is a core part of the landlord business. A diligent landlord keeps up with tenant demand, the performance of competing properties and the pricing of competitive transactions. They’ll know the lowest rate at which they can afford to make a deal and the total cost of a lease transaction that includes concessions like free rent and T.I. allowances. But above all else, they know just how valuable your company’s occupancy is to the value of their building. For most occupiers, several years pass between negotiations. When it’s time to consider a renewal, landlords already have the advantage because they follow the market so closely. Having an experienced occupier representative can level the playing field. You’ll be equipped with information that rivals, and often exceeds, your landlord’s.
Assuming Commission Savings Will be Passed on to You
Landlords usually calculate brokerage fees into the cost of owning and leasing their properties. If your business negotiates its renewal directly, you may assume the landlord will pass this commission savings onto you in the form of a reduced rental rate or concession. But by self-performing, occupiers give up market leverage and forfeit vital information that could radically impact the landlord’s renewal proposal. Like any business, it’s not in the landlord’s interest to reduce its return; what they may propose as savings on broker fees is often a fraction of what a savvy real estate professional can provide.