The best leases for tenants are negotiated with leverage. When commercial property in a given market is owned by fewer landlords, and leased by fewer real estate companies – who has the leverage? How does this affect you, the tenant? I’ll share some concepts that may help illustrate what this may mean for you and your office lease terms.
You may or may not be aware that commercial real estate is trading fast and furiously these days. Real Estate Investment Trusts, Insurance companies, pension funds and private investment firms are very active buying and selling commercial investment property. As an example, Prologis is in the process of acquiring KTR Capital Partners – a transfer consisting of approximately 70 million square feet across multiple states. Many more transactions just like this have been taking place over the past 12 months. The duration of this trend is anybody’s guess. This activity may continue for two years or two days.
Recently, I had a transaction where my client had considered dozens of buildings in a Florida market – and three of the final four properties under consideration were owned by the same landlord. You can see how this might limit our leverage – but fortunately we were able to negotiate the lease well. Recently in Boca Raton, a prominent developer/landlord acquired a near monopoly of the Class A towers in its plum submarket at record purchase prices – proforma’d with high lease rates based on a robust market. As such, this new landlord immediately increased the Base Rates by 28% with one swift spike. Fortunatetly for the landlord, they are signing leases at these increased rates; however, I don’t know for how long.
You can see how these conditions may be adverse to commercial tenants. Also, as more institutional entities such as hedge funds acquire commercial property, we may witness a more stalwart and less entrepreneurial approach – as landlords concentrate on asset value and shareholder return over cash-flow and occupancy. For example, sometimes clients need more flexible lease terms – which may not be accommodated because of overriding underwriting and lender demands.
Another facet of industry consolidation that may affect tenants is the commercial real estate brokerage consolidation trend. Recently, international brokerage DTZ company acquired Cassidy Turley, and is now under contract to acquire behemoth Cushman & Wakefield. Mega-brokerage Jones Lang LaSalle has also been acquiring companies such as The Staubach Company and others in recent years. When this occurs, several things may happen. As in the example above, a commercial real estate company that handles the leasing for multiple properties in a market may be the agent for several of your top options. If a tenant is simultaneously negotiating three options with one landlord, the landlord will see the odds as narrow that you are working on additional 3rd party properties as finalists. That understanding can only shift leverage to their side. Another possibility is that if a tenant representative works for one of these large companies that also represents buildings/landlords – there is a chance that objectivity may be compromised ‘under the roof’. Committed professionals will work to not let that happen, but the entire transaction is still ‘under the same roof’.
An independent tenant representation company that represents no landlords at all, but has access to all, inherently provides the most credible, objective advice to tenants – and often personalized, responsive service and results. Also, a tenant rep broker that has access to every property with no obligations to any, whose fiduciary responsibility is only to you the tenant, and is a local expert proficient in tenant representation, will serve you well.
As these mega-landlords and brokerages add properties and agents, how will your interests be served best? How will you know that you are receiving purely objective advice? Sometimes the difference between a favorable lease and one riddled with potential pitfalls hinges on credible, objective representation. At Stagman Commercial, we treat your transaction as if it were our own office lease.