With demands for commercial real estate increasing all across the country, tenants are finding that it's not as easy to negotiate with their landlords as it was a year or two ago. It's become increasingly difficult to get rent reductions without a very good reason, and landlords are actually starting to raise rents. This might seem like a landlord's dream and a tenant's nightmare. However, when you scratch beneath the surface, there are ways that many tenants can turn the increasing demands for their spaces into opportunities to achieve better cost performance from their corporate real estate portfolios.
TI Allowances
During the downturn, landlords were hurting as badly as many of their tenants. With vacancies squeezing their bottom lines, many of them couldn't afford to invest in their buildings or in signing new leases. Now that they're filling back up and enjoying growing net operating incomes, many of them can afford to put capital back into their buildings. This can be very advantageous for you if you need to have new space built-out since, for the first time in years, your landlord should be able to afford to give you a tenant improvement allowance. Using the landlord's money to pay for your TIs lets you keep additional debt off of your balance sheet and, in some cases, can make the cost of the TIs go away completely if it doesn't get built into a higher rent rate.
Long-Term Deals
When tenant demand was slack and landlords didn't know which way the market was going to move, many were willing to do anything to fill space, but they didn't want to lock it down for any length of time. Since the landlords assumed that better times were on the way, they wanted to keep their options open so that they could re-lease the space on more attractive terms. The better times that landlords were waiting for are now here.
You probably can't steal space anymore. Then again, you didn't steal your space before the downturn occurred and your business was probably able to handle the cost. Since the market is normalized, you can sit down with your landlord and work out a long-term deal. The long-term lease gives you stability, while it gives your landlord the knowledge that he won't have to worry about vacancy, leasing commissions and paying for tenant improvements for a new tenant for a while. You should be able to leverage this to get a reasonable discount on your rent.
Watch for Overbuilding
When the real estate economy recovers, developers get back to business, as well. After they've built their pre-leased projects, they usually started developing new buildings on "spec." In many markets there are more landlords speculating that they'll be able to lease their newly constructed spaces than there are tenants to fill those spaces. When this happens, it's a great time to be a tenant looking for new space. You should be able to sign leases for highly desirable newly constructed space with very competitive rents and generous tenant improvements and other concessions. After all, if you don't lease the space, it'll just continue sitting vacant, so your negotiating position is extremely strong.
It's been said that every crisis contains an opportunity. While the ending of the lopsided tenant's market might seem like a crisis, the return of tenant demand is really an opportunity. Instead of running your corporate real estate portfolio by the seat of your pants on a year-by-year basis, you can finally lock down stable long-term agreements at good pricing.
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