Many tenants conduct their own lease renewal negotiations directly with the landlord’s leasing agents when their lease is nearing expiration. The main reason why they do this is that they think having an advisor representing them will hurt their relationship with the landlord. Another reason we commonly hear is that the tenant isn’t going to even consider moving so they don’t really need a tenant advisor. Both of these reasons will diminish your negotiating power.
One exception is large corporations that lease space. They have dedicated real estate departments that understand the value of using tenant-only real estate advisors to negotiate lease renewals on their behalf. These corporate executives want an advisor that:
- Knows the market conditions
- Is aware of lease concessions available
- Understands how landlords are looking at capital investment in leasehold improvements
- Is familiar with the building, the landlord, and the landlord’s leasing agents
- Most importantly corporations want an advisor that is only representing their interests in the lease renewal negotiations
The good news? You don’t have to be a large corporation to have a trusted advisor on your side. Every ITRA Global member exclusively represents tenants and has the expertise to develop a lease renewal negotiation strategy on a client’s behalf by conducting a thorough examination of the landlord’s position with respect to the building and to their portfolio of buildings in the market. It is very important to understand all the dynamics that could impact negotiation strategies and tactics used to create leverage for the tenant. Leverage, or the appearance of leverage, is what leads to negotiating the best lease renewal terms possible.
The Building Where the Space is Located
We have market data that outlines the subject building’s vacancy rate, other tenants in the building, and information about recent leases that the landlord has completed. This information is evaluated to better understand whether the building has positive leasing momentum in the market, if other tenants in the building are expanding, or if tenants are likely to leave when their leases expire. Why is this important? Well, if the building is 90% leased but a large tenant occupying 25% of the building is moving out in 14 months, then our client has more leverage.
What Is the Condition of the Space?
Are there space characteristics that would make it difficult for the landlord to re-lease it to a new tenant if our client relocated? This is often overlooked, but it is a critical element in lease renewal negotiations. Spaces far away from elevator lobbies and bathrooms are generally more difficult for a landlord to lease to a new tenant, so we use that to our advantage. Ceiling height, light fixture type, and the age of finishes in the elevator lobby, corridor, and restrooms are also considered. All of these elements help to calculate the landlord’s level of confidence in re-leasing the space to a new tenant, and what the landlord would need to spend on improvements to the space/building to attract a new tenant if our client were to move out.
The Landlord’s Portfolio of Buildings in the Market
Many landlords own multiple buildings in one city that are typically part of a portfolio of buildings managed by an asset manager that oversees all of the leasing, renewals, and capital expenditures. When it comes to leasing decisions, the asset manager will be more aggressive if there are upcoming vacancies or lease expirations within the portfolio. If the portfolio has very little vacancy, they will be less flexible in negotiations. But if the portfolio has vacant space, then the landlord will probably be more aggressive in lease negotiations because they don’t want to add more vacant space to their portfolio. An experienced tenant advisor is going to research these factors and will use them to the tenant’s advantage in negotiations.
Why Self-Representation Works Against Tenants
Most tenants that negotiate a lease renewal directly with their landlord do so because they have no intention of moving. Unfortunately, the landlord and his leasing agents know this too. When a tenant tells the landlord’s agent they are interested in extending the lease but don’t have an advisor representing them, that’s the biggest “tell” in the real estate industry that the tenant has no intention of moving. To make things even worse, the tenant usually tells the landlord’s agent they are representing themselves because of the relationship they have with the landlord. These two things combined scream “I’m definitely renewing my lease so I’ll probably take whatever deal you give me.” Congratulations, in two moves the landlord almost has checkmate on you. In all seriousness, this self-help path by tenants provides the landlord’s agents with instant leverage and defines the tactics they should use to negotiate the best lease renewal terms for their client, the landlord.
It is important to know that real estate is a data-heavy industry and that (statistically) approximately 75% of all tenants will renew their lease versus moving. That percentage increases when the tenant negotiates on their own behalf. The numbers tell the tale, and the landlords know the numbers. Tenants do not know current market conditions and probably haven’t seriously investigated relocation options. It will only take the landlord’s leasing agent a few questions to figure out that your company has no intention of moving and the lease renewal terms will not be in your favor.
In contrast, when a tenant advisor represents a tenant, it is a clear signal to the landlord that the tenant is considering relocation because they have a real estate expert on their team. The landlord will not know for certain if the tenant is looking at alternative spaces available in the market for lease or sublease, and maybe even buildings available for purchase. The tenant advisor also knows current market conditions and acceptable lease concessions. Now the landlord and their leasing agent have doubt instead of certainty about whether their tenant is staying or not. And doubt creates leverage in negotiations. Even if your company has ZERO intention of moving, the best thing you can do is hire a tenant advisor to show the landlord that your company is exploring relocation options if the terms are unfavorable.
Industry Insider Experience
The principal level advisors of ITRA Global are market experts that understand small cues and scraps of critical market data can favorably impact leverage in lease renewal negotiations. When combined, these factors can produce superior outcomes for our client's on a lease renewal when correctly implemented. It takes extra time and effort to evaluate the elements noted in this article, but it is necessary to deliver the best possible results for our clients on lease renewals. We don’t assume the landlord is offering fair terms—we complete our own due diligence.
If your company has a lease nearing expiration in the next 2-3 years, visit our webpage and fine one of our expert advisors near you. All ITRA Global members exclusively represent tenants and provide principal-level expertise that is based on transparency, integrity, and trust. With members throughout the world, ITRA Global is uniquely positioned to meet all your real estate advisory needs.
Our Difference is Your Advantage
Article submitted by Wayne Teig / ITRA Global Minneapolis-St. Paul, Minnesota USA
