In many situations business owners and companies (tenants) think landlords will reduce the rental rates on commercial real estate space (office, retail, warehouse space) they rent by not hiring a commercial real estate broker.
The thinking goes something similar to below:
If a landlord of a commercial building (office, retail, or warehouse space) is asking for a market rental rate of XX dollars per square foot, and the brokers commission, which is paid by the landlord, is YY percent then by not using a broker the landlord might reduce the rental rate to ZZ dollars per square foot.
Without knowing what “market conditions” are for commercial space it’s very unlikely that the tenant will know what “market rent” is for comparable space. In addition, landlords are unlikely to strike a deal at ZZ dollars per square foot because that could alter the rent level in a way that affects the overall value of the building……….even in deals where tenants are represented by commercial real estate brokers. Higher rental rates equate to higher building values so it’s better for landlords to maximize rental rates. Lowering rental rates for one tenant just because they did not have a broker involved would mean more contentious negotiations with other tenants and with the brokerage community as a whole.
To avoid these situations landlords include leasing commission costs in the operating budgets of commercial buildings, and if there is a mortgage involvded the banks will require it.
There are many advantages and resources that a commercial real estate broker can bring to the table that assist tenants in achieving optimal deals on commercial real estate space renewals. Below are a few to consider:
Lease renewal negotiations done the right way consume a great deal of time and without solid market knowledge, experience, and resources you will NOT get the best deal possible. By hiring a commercial real estate broker you will be able to focus on your business while they do all the legwork of finding other similar opportunities, doing extensive apples to apples comparisons & evaluations, negotiating terms, conditions and the lease renewal documents, etc.
If a landlord knows that a tenant is not being represented by a commercial real estate agent they will have a pretty good hunch that the tenant prefers to stay in the present location and will renew the lease. The fact that a landlord knows this gives them the upper hand. A good commercial real estate broker will create a competitive environment making the landlord believe that the tenant will relocate if a better economic lease package can be negotiated elsewhere. Most landlords would prefer to keep existing tenants as it typically cost them more to find a new ones (e.g. loss of revenue from space being vacant, improvement costs, etc.).
Your commercial real estate agent will have your best interest in mind and has no interest in promoting one commercial property over another. This means that they will negotiate on your behalf and ask the landlords all the right questions that will drive towards getting the best deal. For example why is the after hours hvac cost $50 per hour here while the other building’s cost is $25? Why does the lease term have to be 5 years vs the other building only requires a 3 year lease? Your broker will obtain the most objective evaluations of all the buildings during the renewal process and will help the tenant thoroughly analyze its current and future space needs to ensure you don’t lease to much or too little space.
An experienced commercial real estate broker has workable relationships with many landlords and can act as a buffer in the event a lease renewal negotiation process results in bad feelings, etc. There will come a time before or after a lease has been executed that the tenant will need something from the landlord. This also comes in handy in a tight market when space is scarce. Because of the relationships a broker has your ideal space is less likely to get leased to someone else.
There are many factors to consider when negotiating lease renewals. An experienced commercial real estate broker has many resources to pull from to ensure that every one of these factors is thoroughly evaluated. For example if a landlord is offering a tenant improvement allowance of $20 sf how do you know if that will be enough? A broker will engage a few contractors to get preliminary construction bids so you will know how far that allowance will take you. If it’s not enough they will negotiate on your behalf to get more.
In summary, the benefits of hiring a commercial real estate broker to negotiate your lease renewal far outweigh going at it alone. Hiring a good agent will save you time, generate negotiation leverage, give you insight, build long-term relationships with landlords, and provide you with the tools, experience, and resources to ensure that you get the best deal possible.