What's Wrong With This Picture?
In the office space leasing business, why is it a common occurrence that renewing tenants are treated less fairly than new tenants?
John Gay, Managing Principal at Cresa Orlando, has been in the Commercial Real Estate Industry for 33 years and shares some of his best advice about handling a lease renewal.
Q: Why should a tenant use a broker for their renewing office space lease? Doesn’t it just add an extra layer of cost to the landlord and therefore to the tenant?
A: This is the big joke in our business. The renewing tenant has established a credit relationship with the landlord, they typically don’t need as much in way of tenant improvements, and their renewal delivers a clear projection of future rent to the landlord. Yet landlords will give a renewing tenant a worse deal than the new tenant off the street. That’s because landlords view renewing tenants as captive, and factor a high renewal probability. Furthermore, most tenants will avoid lengthy operational decisions that take their focus off of their business, and landlords know it. The result of negotiating a renewal direct with your landlord is almost always an above market deal.
Q: What about the extra cost, don’t tenants bear this in higher renewal rates?
A: Not necessarily. Most institutional landlords will pro forma real estate commissions into their annual budgets so commissions have no impact on the “economics” of the deal. And the broker’s fiduciary responsibility is to the tenant, even though they are paid by the landlord. You got to like that if you’re a tenant.
Q: When should a tenant start addressing the renewal process?
A: It depends on the market, size of the space and the tenant’s internal process, but generally, 12 months in advance.
Q: What leverage does a tenant have when it comes time to renew?
A: Depends on what part of the market cycle we are in. If it’s a Tenant’s market, where there is a high supply of available space, tenants have a great deal of leverage. Conversely, when demand has kept pace with supply, landlords are less likely to bend on concessions during the renewal process.
Q: How can a tenant make the landlord compete to keep their tenancy and agree to provide the best terms possible?
A: Allow ample time for negotiations and be impartial to renewing versus relocating. When it becomes a logical, unemotional decision, entirely determined by market conditions, the tenant becomes a ‘free agent’ and will effectively reduce risk and see better lease terms.
Q: Won’t the hiring of a professional tenant rep upset the relationship between a tenant and their landlord?
A: Sure, they won’t like it. They won’t be able to dictate terms. Look, landlords know that the unrepresented tenant will not have access to recent comps in the market, or know what key lease points are open for discussion. As the expiration of the lease nears, a tenant is less likely to have time to find suitable alternative space, which further reduces their leverage. The longer the tenant waits to engage a tenant rep, or thinks their goodwill with the landlord should count for something, the worse of a deal they will get. Let’s face it, the landlord’s fiduciary is to their stakeholders, not to their tenants.