Many parts of the country are well into an economic recovery. While this has broad ranging effects, one of its largest impacts occurs in the commercial real estate industry. In a stronger market, the balance of power shifts to the landlord's favor. However, even in strong markets, you still have negotiating leverage if you can think like a landlord.
Tenancy in Tough Times
When the economy was weak, you enjoyed a largely one-sided negotiating position. In most markets, vacancy ran rampant, so your landlord knew that if he did not meet your terms, another one would. This probably allowed you to negotiate lower lease rates or, at a minimum, lock in your current rate for more time.
At the same time, you might have experienced a few challenges, too. Many landlords were reluctant to write very long-term leases since they didn't want to lock in the low rents of the downturn for an extended period of time. At the same time, cash-poor landlords were motivated to find tenants, but might not have had the money to subsidize tenant improvements. Both of these challenges can dissipate in better times.
Tenancy Today
Today, with occupancy rates increasing and rents climbing, it's harder to be a tenant, and as the economy continues to improve, landlords will continue to enjoy an even stronger position. You've probably found that your rents are going up and requests for rent reductions are falling on deaf ears. In other words, the market has normalized.
In a normal market, landlords are worried about three things:
- Eliminating vacancy
- Maximizing profits from leasing
- Minimizing tenant acquisition costs
This may seem obvious, but it creates an opportunity for you to position your business in quality spaces on a long-term basis. These three bullet points form a simple equation that will help you to think like a landlord:
Net income = rental income - vacancy - brokerage costs.
The upshot of this is that even if a landlord could go out to market and find a better tenant, they'd have to absorb the cost of your space potentially sitting vacant while they look for the tenant and they'd have to bear the cost of sourcing that new tenant. After all, it doesn't make sense to spend $20 per foot in TIs plus 6% in commissions to get a new tenant for an extra $2 per foot in rent on a seven year lease. As long as maintaining you as a tenant is a better economic deal for a landlord, you should be able to work out an arrangement.
Your landlord also should have more capital for improvements with a different view of the future. If you need to move or have TIs done, he may be better positioned for such projects. Plus, while the future could be better, there's less harm in locking in today's lease rates than there would have been a few years ago. As such, you should be able to structure good long-term tenancy arrangements for your company.
Overdevelopment: A Tenant's Best Friend
When the market recovers, developers tend to increase the amount of space that they build. As they transition from building pre-leased space to erecting new buildings on spec, the market usually ends up with a temporary surplus of space. This can create a short-term condition where rents fall and concessions increase. In addition, because new buildings frequently come with generous TI allowance, an overbuilt market can be an excellent time to not just sign new leases but also take down completely new space, customized to your company's changing needs.
Other great Commercial Real Estate articles:
