A commercial real estate lease is typically one of the top three ongoing operating expenses for small or large businesses. To make things worse, in most commercial office leases you will have yearly rent escalations of 2-5%. For tenants who have been in the same office building for a long time and just simply renewed their lease each time the situation might be even worse. Because of this tenants who renew office leases typically pay higher lease rates and receive fewer economic lease concessions than new tenants leasing space in the building for the first time. What this means is that landlords will give better lease terms to newer, untested tenants than to those that are loyal repeat customers, UNLESS you know how to negotiate an office lease renewal.
I don't know many companies that like to relocate their offices unless they have no other options. Relocating your business causes downtime, unproductivity, and potentially loss of income……. AND landlords know this.
Office lease renewal negotiations are about agreeing on a price fair (aka market rate) for the tenant and landlord. The price you get on commercial real estate deals is dependent on leverage not necessary market rate. Who has more of it……the landlord or tenant?
Below are a few key things that landlords consider when determining their leverage with tenants on office space renewals.
Studies have shown that 70% of all office tenants extend or renew their office lease on or before their lease expiration date.
Not Enough Time
Office tenants who wait until the last minute to start negotiating their renewal typically have no choice but to renew their lease. Waiting too long to evaluate your alternatives puts you at a disadvantage. If relocating your office was the best option, and you had 10,000 sf, you would need to start planning at a minimum 8-12 months before your lease expires. You need plenty of time to determine your space projections, survey the market, visit properties, negotiate lease rates and terms, perform space planning, get construction bids, get city permits, and build out the space. You can do this in less time however that limits your options and creates a lot of stress.
Business decision makers understand the concept of creating leverage, however most of them don't do it with their landlord. They simply tell the landlord that they want to renew their lease. By doing this they have just told the landlord that there will be no competition from other landlords. When a tenant wants to relocate they create competition by evaluating various buildings against each other to get the best deal. Why don't they do this with lease renewals? If you wanted to relocate your business you would probably hire a commercial real estate advisor. Do the same for renewals and treat them like you would if you were leasing space for the first time.
Some businesses hire a commercial real estate company when they are leasing space for the first time or if they plan on relocating their business, however NOT when renewing their office lease. This saves the landlord money in two ways: 1) They won't have to pay a tenant representative commission, 2) They won't have to compete with other landlords for your tenancy. Some landlords will tell you that they will share the commission savings with you, however beware of this. The commission savings are small relative to the higher lease rates they are hoping to charge you since you don't know the market as well. The reality of this is that landlords will pay themselves that commission savings not pass it along to the tenant.
Landlords and building owners lease office space every day, and they are well advised by local commercial real estate agents that specialize in leasing office buildings. Leasing office space is their primary business and how they make money. Conversely, most business decision makers are not in the commercial real estate business and may negotiate an office lease every 3-5 years. It's not their primary business and not how they make money. If your planning on handling the office lease renewal yourself think of it as a pro-am match up between you and the landlord.
Are you really considering relocating your business or just trying to bluff your existing landlord. Never bluff. The stakes are too high.
Understanding the points in this post is a good place to start to maximize your office lease negotiations however there are many other factors about your existing office space and the building itself that should be researched and evaluated. Factors such as tenant improvement costs to rebuild a space for a new tenant, the current buildings cash flow and future rental projections, time and risk involved to find a new tenant, etc, should be considered.