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Who Has the Leverage in this market?

In office leasing, it is important to understand at what point one is not leaving anything on the proverbial table and also when one is driving a landlord beyond their threshold of pain where the negotiation becomes counter-productive. Sometimes clients are stunned by my aggressive approach at negotiations and winning landlord concessions for them while at other times I must manage expectations. Frequently, consumers working without representation do not know where a landlord’s threshold is and thereby fall short of what they could accomplish.  The flipside is that they can overreach and a landlord may see that as an unpleasant sign of the shape of things to come. In this case the tenant loses credibility which diminishes their position and they risk losing that which they want.   The best way to win the most favorable terms achievable on space that one does not want to lose is by fighting for terms that are ambitious yet realistic, but not terms where one will lose the opportunity to lease that which they really want and regret using an ineffective approach.  Finding the balance is the key.

One way to determine how much to reach for and how hard to push is through old fashioned due diligence. Learn what the subject property’s vacancy rate is.  Find out the immediate market’s vacancy rate.   Expert tenant representatives may know if a landlord is due to receive back a large block of space in the coming six months. That intel is like gold.  If you know that a specific landlord is due to get back 10% of their property’s space and they do not have that accounted for with incoming tenants, that usually translates into considerable fear for the landlord and leverage for the tenant. Conversely, if a landlord has been experiencing absorption in recent months, then they may be spoiled and less generous toward new prospective tenants.

One landlord in my market will not stop talking about how much space they have leased this year, and that drove a limitation of concessions in a particular transaction.  Then again, if landlords see this economy as fragile and want to sign as many leases as they can, as fast as possible, they will not squander any decent opportunities. Landlords’ positions in this market at this time, as always, are case-by-case.  There is no predictable position. It is always different building-by-building.  One trend that I have noticed, though, is that with the limited absorption – rather than the net losses that have occurred over the past several years – some landlords are less inclined to underwrite complete ‘turn-key’ build-outs.  That said, lately I have heard numerous landlords state that the phone is not ringing as much as it was over the past few months.  That is not a great sign for the economy, but it is a good sign for tenants in terms of their leverage. Use it responsibly.

Another great lever of information is the landlord’s debt position.  Do they have positive or negative leverage? Are they servicing only 20-30% debt relative to the value of the building?  Is the building underwater in terms of their balance of financing vs. the value of the asset?  If so, how much scrutiny does the lender have over the terms that a landlord can agree to?  Do they have the authority to craft a sweetheart deal for a tenant?  This matters. Sometimes landlords are bound by a proforma target rent for a space, and to accept otherwise would reduce the value of the asset (lender’s collateral). So, even if a space has been vacant for a year or more, the landlord may not be able to convey terms that seem otherwise plausible under the circumstances because the lender has this control.

As a warning, sometimes landlords will not provide a courtesy alert even if you are negotiating in good faith.  If a favorable transaction comes their way and they think that you are driving too hard of a bargain, they may just take the path of least resisitance and lock it in. So, beware of your approach.  How much risk are you prepared to assume? Be aware of this and act accordingly.  If you are concerned, ask the landlord to provide you with a professional courtesy alert should they have other substantive activity on the space of interest. This may help you not lose what you want.

My best advice is to get great local advice from an expert tenant representative that knows the landlords, the buildings, and all the important nuances that can benefit you as a consumer of office space.

2018-05-03T14:46:37+00:00Tenant Tips|