Where Is Your Leverage?
As with any negotiation, understanding your value and knowing where you have leverage is essential to any transaction. The size of your company, your track-record and financial strength are what you bring to the table. If you are in the market for office space, or any commercial space, understanding each party’s position will help you negotiate efficiently to procure the most favorable terms.
What is the “Tenant’s Market” Post-COVID?
Yes, post covid, has left us in what is considered to be a “Tenant’s Market” in the Office sector, and lots of companies are downsizing. As a matter of a fact, the greater Washington DC area has a 16+% vacancy rate as of Q2-2023 and that does not include subleases that have flooded the market. But tenants are renewing leases and new leases are still being signed. There will always be a need for office space, but clearly the demand for workspace is significantly lower given how people are looking to utilize office space in the future.
Tenants do have a lot of say in this market when it comes to what they want to see in the workplace. However, there are limits and understanding both your position and the landlord’s position will be valuable when coming to the table. Be aggressive but don’t be greedy in what you demand of the landlord.
Many Class A landlords have made huge investments in upgrading the quality and types of amenities in their buildings in hopes of attracting new tenants – from roof decks and town halls, to upgraded fitness facilities and conference centers.
But there is no question, the office asset class is distressed. According to Bisnow, by 2029, office properties across America will lose a collective 49% of their value. Recently several national landlords have been in the news for defaulting on their commercial loans. These are landlords that you might otherwise say are too big to fail. And for the most part, they will be fine and are just troubled in certain buildings in certain markets. But with interest rates and operating expenses going up, buildings with high vacancy rates are not performing at a level strong enough to support their original debt service and are most at risk for foreclosure. And with these struggling assets, Landlords are frequently faced with either defaulting or renegotiating loan terms. As you might imagine, very few lenders want to take back vacant office buildings in today’s market.
The Importance Of Understanding
If you are a prospective office tenant with strong credit, you will likely see, plenty of rent abatement and a healthy tenant improvement package offered to you, but you might not see the big rental rate reduction you were hoping for. It is important to know why that might be the case, so working with an experienced broker can help you understand and negotiate the right market deal for you. It is also important to remember, landlords evaluate a small, fledgling start-up company differently than they do an established organization with a strong P&L.
Also understanding your landlord and what drives their decisions is important. Are they a large publicly-traded REIT answering to investors and lenders, or are they a small local owner with a low basis and no debt on the property? Is the landlord strong financially? Or has covid left them teetering on the brink of default? What is the vacancy rate in the building you are considering?
Knowing that most commercial buildings carry some form of debt is important. And most of today’s buildings were projected to perform based on pre-covid market dynamics. Some landlords have lease thresholds and need to gain lender approval before signing a below-budget deal.
Especially landlords who own Class A buildings, still have good activity and prefer to wait for a strong credit tenant. Some landlords are teetering and may be on the brink of letting their building go back to the lender so you need to know what the landlord’s situation is.
Why You Should Hire A Broker…
In this post-covid world, with supply-chain shortages, skyrocketing construction costs, rising interest rates, broker commissions and rent abatement, many landlords don’t even see a return on their investment in a new lease for two or more years. Your broker can help you understand the dynamics of any potential transaction and the position of the players so you know where to push and how hard to push in your next lease negotiation.
If you are a minnow, be aggressive, but don’t negotiate like you are a great white. Set realistic expectations and get the best deal you can for a space that checks your most important boxes. Be prepared to be flexible.
There is an old saying on Wall Street …
“Bulls make money, bears make money, pigs get slaughtered”.
For more information or a complimentary analysis of your office space
requirement, please email Kay@TartanProperties.com
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