Many tenants assume their commercial real estate lease will be renewed on reasonable terms and leave an insufficient amount of time for the renewal to be negotiated. Unfortunately, landlords frequently offer renewing tenants terms that are not as good as those offered to new tenants. The landlord knows that new tenants are in the market shopping around and that to attract new tenants, the landlord must be willing to match the competition in terms of rental rate, free rent, utilities, tenant improvements, building systems, communications, security systems, electrical capacity, lobby appearance, and other factors. However, if you are a tenant interested in a lease renewal, the landlord presumes – and tends to be right – that you are not shopping around.
Here’s a proven strategy for getting the best terms in your renewal — even if you are 100% committed to staying at your current location.
1 – Use time to your advantage.
You need to start early enough so you have time for all the normal phases of site selection, financial negotiation, and analysis, lease negotiation — plus time to walk away from a bad deal and continue negotiations elsewhere if need be. This means that if you plan to renew at your current location, you should be actively assessing your options at least 12 and preferably 18 months before your target move-in/renewal date.
2 – Understand your options in the marketplace.
If you don’t have a good idea what lease terms other tenants in the market are getting now, then you have no way of determining whether a landlord’s renewal proposal is a good deal or a bad deal. Your landlord’s offer could easily be less generous than what other tenants in your building or your submarket are getting. In that case, it would qualify as a bad deal even though it might be an improvement over your original lease. A good tenant rep broker can update you on market rates, concessions, and incentives.
3 – Use your inside knowledge of your current building and/or landlord’s operations to formulate the terms of your commercial lease renewal.
As a long-time resident of the building where you plan to renew, you have a key advantage that can help you secure improved lease terms. You know the physical characteristics of the building and how it has functioned in the past. If you have always been dissatisfied with the way the common area lavatories look, elevator waiting times, how the HVAC system functions, etc., your tenant representation broker should be specific about these issues in negotiating your commercial lease renewal.
4 – Let your landlord know you are actively seeking alternative locations.
Preserving good relations with a current landlord is often cited by tenants as a reason for “going it alone” when it comes to negotiating a lease renewal. The unfortunate effect of such a strategy is that it reinforces ownership’s belief that you have no options and don’t take the prospect of lease negotiations seriously. It’s a clear sign that you are prepared to settle for whatever is offered. When a landlord understands that you are touring other locations with a broker, they are likely to become more realistic about what your lease renewal is worth.
5 – Understand what it will cost your landlord if you move out.
It is a fact that if a tenant moves, the commercial real estate landlord will incur costs. However, the landlord will also incur substantial costs if you leave for more favorable terms elsewhere. For instance, potentially lost revenue, promotional costs, brokerage commissions, infrastructure refurbishment, demolition costs, and build-out costs. In every situation, these costs can be quantified with a high degree of accuracy and should be part of commercial lease discussions with the landlord to maximize the value you get as a renewing tenant.
6 – Be prepared to move if you can’t get market-rate terms.
Ultimately, if your analysis of the market indicates that by moving you will incur substantially lower costs over the term of the lease, this is probably the option you should select. Moving for marginal savings – 2% or 3% — might not be warranted, but if projected savings are 10% or more, this is likely to be your better option.
Mobiliti CRE is a commercial real estate brokerage that focuses 100% on representing buyers and tenants. We would be happy to review your commercial real estate lease on a confidential basis and discuss your options with you. We can be reached at (813) 300-2227 or feel free to email us at firstname.lastname@example.org.