Larger commercial office properties are bought and sold from time to time. But, what does this mean for lease costs for tenants in that building? If your company’s lease is expiring within a couple of years of the sale, then your lease costs will probably increase due to the ownership change.   

Different types of businesses own institutional-quality investment real estate. The most common are insurance companies, pension funds, real estate investment trusts (REITS), and private equity funds.  Each type of owner has different financial objectives that will influence how they negotiate tenant lease renewals.

• An insurance company might focus on steady returns over a long ownership period, so a tenant renewal might be uncomplicated.
• A private equity fund may be much more aggressive in increasing renewal rental rates - hoping to sell the property just a few years after buying it to make a quick and sizeable profit.
• Some industrial private equity groups are leveraging the tight market conditions and increasing tenant renewal rates far above average, specifically targeting those tenants that would find it very difficult and expensive to relocate – assuming they could find alternative space.   

Below are the TOP 3 REASONS your lease costs will likely increase when you renew your lease:

1. The buyer of the building made financial assumptions about the market and the rental rates.  This is applicable to both new leases and lease renewals. In most cases, the buyer is assuming they can get a higher rent than the prior owner, otherwise they wouldn’t have bought the building.
2. Many buildings today are being sold and then the new buyer is “repositioning” the building by adding amenities and refurbishing common areas. These improvements are being made so they can increase the rental rates. New training rooms, conference rooms, grab and go food stations, and fitness centers will attract space interest and the landlord will expect to get more rent on account of these improvements.
3. Most real estate sales today are at or near all time high prices. In many cases, that means the real estate taxes for the property will increase. How much the taxes increase depends on a variety of factors, but in some cities there aren’t any caps on how much the taxes could increase. This impacts a tenant’s costs soon after the building sale is completed and that would continue through the renewal term as well.

During the two to three-year time period following a building sale, most ownership groups will not deviate much from their original purchase assumptions, partially due to lender proformas & financing conditions. This makes negotiations even more difficult for tenants with respect to rental rates and also pertaining to tenant improvements, tenant rights and options, and other lease related business points.

The pandemic has caused the office market to shift dramatically in some cities and that market movement is continuing. In times like these, tenants need to be careful about extending a lease without understanding the new and changing market dynamics, especially if the property was recently traded.  

An experienced real estate advisor can provide a tenant with guidance about how to approach a lease renewal when a building sale has been completed and how to overcome some of the challenges outlined above. The advisor will also outline potential relocation options so that a tenant can evaluate their cost projections for their current building versus relocating.