ITRA Global News

What worries your landlord as your lease renewal approaches?

May 11, 2017

As your lease renewal approaches, you should seriously evaluate several issues: Does your current space still fit your business needs?  Can you negotiate a new lease with better terms?  Would purchasing a small building instead of leasing save you money?  Should you relocate to capture new lease incentives at a better location?  There are many questions that should be answered prior to making a serious business decision such as renewing your lease.  While you are evaluating your next business move, your landlord has serious concerns of his own.  Your landlord’s bottom line is directly related to your tenancy and history of paying rent.  Thus, your landlord will do everything he can to retain you as a tenant while also trying to increase his rent revenue. However, the possibility of losing you is a serious concern as this creates a hiccup in the bottom line.  The following four factors are what keep your landlord awake at night as your lease renewal approaches.

Cost - After a tenant vacates, the landlord knows with certainty that significant costs will arise to re-lease that same space.  No two businesses are alike, and thus no two firms desire identical space layouts and improvements.  Upon a renewal, most sophisticated tenants will utilize their Tenant Rep Broker to negotiate incentives such as new carpet and paint at an approximate cost of $8 per SF to the landlord.  If this same tenant instead vacates, the landlord will likely need to spend $40 per SF or more, to get the space ready for the next business.  This price differential is staggering, and landlords are well aware of this.  Sometimes renewing the tenant at a discounted rent, is more cost effective to the landlord when compared to funding a full remodel.

Downtime - Rental income downtime is one of the largest unknowns in the landlord’s operation.  Will the space be vacant for 3 months or 3 years?  There is never any way to accurately foresee the leasing metric timeline of a specific rental unit.  Even when the landlord has a backup interest, until this group signs a lease nothing is guaranteed.  Let's pretend this backup interest is legit - this same rental space will still not generate income for many months.  The time needed to finalize lease terms could take anywhere from 1-3 months (and Yes, I have seen it take much longer).  Only after a lease is fully executed, will the landlord authorize construction to start.  Depending on the amount of work needed, construction could take another 1-3 months (Add on another 30-45 days if permits are required).  Finally, how much free rent was negotiated and awarded to the new tenant?  This is highly negotiable, and depending on the experience of your Tenant Rep broker, could be as long as 6 abated months.  Therefore, a landlord could be looking at up to a calendar year before they start seeing rental income on a newly leased space.

Vacancy - Vacant space reduces operating income and deteriorates the overall value of the building.  When touring with clients, they always seem to ask me, "How long has this suite been vacant?"  This is an important part of the thought process that all moving businesses consider.  No one wants to lease a location that others dislike.  There are always problematic spaces either in an oddly shaped corner of a building, or with limited windows, or near the restrooms.  And once a space stays on the market for a prolonged period of time, the landlord ultimately has 2 options: spec it out and spend money prior to knowing the exact needs of the tenant, OR leave it as with its pink carpet and wood paneling circa 1992.  Additionally, businesses prefer to be located within buildings that create good operating synergies.  Referrals are a strong resource for any and all business models, and no better referral than "go just down the hallway."  If that hall is empty, it's highly unlikely that any business wants to be the only one there.

Image - An empty building is an ugly building.  And vacant buildings typically have an uphill battle to get leased.  Buildings that are mostly empty don't have the operating capital to maintain the building image and aesthetics desired by most tenants.  As tenants consider vacating a building and looking for greener pastures, Landlords worry about why.  Tenants become friendly with their neighbors, and as they relocate, sometimes negative rumors spread.  Businesses in any market are aware of the "problem buildings" and tend to stay away from an negativity that could reflect poorly on their business.  Landlords are always working on ways to enhance their buildings image, and keeping it current is a costly and frustrating ordeal.  The Landlord business can be a pride-based business, and when a tenant vacates a space, it's a hit to the bottom line as well as the ego.

William Strong is a pure Tenant Representative broker with Riviera Commercial Real Estate.  His commercial real estate experience spans over 14 years.  And his pure dedication to assisting tenants lease and purchase property in San Diego is second to none.  As a San Diego native, he has spent decades watching this Southern California market grow and prosper; and has helped 100s of business find the right property at the best price.  As the exclusive San Diego office of ITRA Global, Riviera Real Estate and William Strong are part of an international network of independently owned and operated Tenant Rep offices that span the country and the globe.  So, if you want local expertise with a worldwide presence, don't hesitate, email William today at wstrong@itraglobal.com

ITRA Global is an organization of real estate professionals specializing in representing commercial tenants and buyers in the leasing, acquisition and disposition of office, industrial and retail facilities. With coverage in major markets around the world, ITRA Global is one of the largest organizations dedicated to representing tenants and occupiers of commercial real estate. Clients benefit by having an experienced professional as their trusted advisor, providing conflict-free representation with total objectivity. To learn more about conflict-free representation and ITRA Global locations, please visit the ITRA Global web site.

Article submitted by Will Strong / ITRA Global San Diego, California USA.

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