Negotiating Office Space
By Joseph Giordano
Getting good deals on office space is a combination of market timing, and good tenant planning.
The real estate office market has hit a tipping point. With vacancy increasing and new sublease opportunities coming to market everyday, office space in major cities is now a tenants market. Rental rates are decreasing and will continue to do so. Savvy business leaders recognize this as an opportune time to leverage their tenancy and take advantage of the market conditions. In order to capitalize on current market conditions business managers must keep in mind the following critical success factors:
1. Leasing decisions have a major impact on achievement of business objectives. It is a mistake to view real estate simply as a cost of doing business. Your real estate decisions are critical and have a tremendous impact on your bottom line. Real estate can potentially contribute greatly to your business performance by impacting three key business drivers: • Profitability -Real estate costs impact cash flow & operating expenses. • Operational Flexibility – Your lease defines your ability to expand or contract. • Impacts recruitment, productivity, and retention of employees.
2. Tenants must plan 12-18 months before a lease expires. Market or business conditions dictate the best time to renegotiate or renew a lease, NOT a lease expiration date. The renegotiation/renewal process takes more time than most tenants realize. Taking full advantage of current market opportunities requires development of a project plan and negotiating strategy. You will need 12-18 months to renegotiate, review legal documents, and make improvements to your space. Allowing adequate time for negotiations to unfold is critical. As a lease expiration date approaches, a landlord knows that it becomes less feasible for a tenant to occupy alternative space. If you don’t start early, you give the landlord the upper hand in negotiations. Tenants must plan 12 – 18 months ahead for maximum leverage.
3. A tenant must have current, accurate, “real” market information. Understanding a landlord’s financial situation, upcoming lease expirations, and negotiating style will enhance your negotiating strength. Access to real market information, actual transaction details, current proposals active in the market, and financial concessions made by landlords, put a tenant on a level playing field with a landlord. Real market information and insight into a landlord’s situation is not directly available to a tenant. It is only available from real estate professionals who are making deals in the market every day. Anecdotal evidence from neighboring tenants is incomplete at best, and often inaccurate and misleading.
4. Savvy tenants are represented in the lease renewal/renegotiation process. Most negotiation experts advise to never negotiate your own deal. This axiom certainly holds true in lease negotiations. Landlords salivate at the thought of negotiating directly with a tenant. The quickest and easiest way for a tenant to compel a landlord to propose market rates is by bringing in a third-party tenant advocate. Even before a professional real estate advisor creates a competitive environment, a tenant will see an immediate change in the landlord’s negotiating posture. This is because hiring an experienced real estate professional will bring instant credibility to the notion that a tenant might relocate. A tenant advisor, through a project plan, ensures that the final solution is not only cost effective, but also supports operations and is aligned with business objectives. A simultaneous, competitive bid process is the key to the best deal. Landlords do not present market-rate offers to tenants until they are convinced that the tenant has a relocation alternative negotiated. Only then, once your landlord has heard on the street that you have another option “teed up” will your landlord propose the most aggressive rates and other economic concessions.
5. Strategically, a tenant should be prepared to relocate if a landlord does not agree to economic deal points in line with the market. A renegotiation or renewal project should be viewed as a “new” project. Organizational structures and work processes change over time. The longer a company has occupied a leased space, the more dysfunctional and inefficient the layout tends to be. Businesses that continue to operate in space that is less than ideal suffer reduced employee productivity. Even if a company desires to stay in an existing location, the space may need to be refitted. Refitting may entail changing the size of the space, reconfiguring the layout of offices or furniture, new paint and carpet, or upgrading the IT infrastructure.
The Bottom Line
In today’s market, tenants who deal directly with their landlord fail to take full advantage of an unprecedented opportunity to reduce costs and increase profitability. Engaging a competent real estate advisor is the only way to ensure that a lease renegotiation reflects current market conditions. Research and experience indicates that professionally represented tenants negotiate leases that are 15-20% lower in total, effective cost (including commissions) than tenants who are not represented. A qualified tenant advisor will: • Employ an explicit, market-tested process to entice landlords to compete. • Have an outstanding track record and provide references. • Provide you with the know-how to make real estate a major contributor to business success.
This article was provided by real estate professional Joe Gioradani, who can be contacted via Joseph.Giordani at cbre.com