Landlords know that the overwhelming majority of commercial tenants renew their leases.
There are common and understandable reasons for this. First, let’s face it, it’s a hassle to move. It disrupts business and it’s stressful for everyone involved, including employees. Besides that, evaluating options requires an investment of both time and money. And then there’s the additional expense of making a move. Without actually quantifying and verifying these potential woes, and choosing instead to remain in a current lease situation based on an assumption that they exist, a tenant is said to be suffering from “Captive Tenant Syndrome”. This is the mistaken belief that they are, in a way, stuck in the space they currently occupy. What if those issues could be minimized or mitigated entirely? Consider the possibility that improved efficiency of the new office may offset the required effort to move. What if the excitement of a new workplace improved morale and increased employee productivity? Perhaps the potential new landlord may be willing to incentivize the agreement. This might mean absorbing the cost of the move or paying to outsource coordination of logistics to make it happen.
When considering a move, it is important to understand the position of both the current landlord and a prospective landlord.
For instance, what would a move cost the existing landlord? And, how motivated is a potential landlord to gain a new tenant? Landlords know that a tenant will consider the negative impact a move may have on their business when facing a lease expiration. Many will count on it to achieve higher profits on renewal leases compared to attracting a new tenant and negotiating at a slightly higher rate. For an existing landlord, there can be significant losses when a tenant vacates. Depending on the type of space and its location, a landlord faces months or years in lost rent while carrying the property tax, insurance, and other expenses. Once a new tenant agrees to move in, there are usually additional costs to get the deal done like improvements, and discounted or deferred rent payment. Both the tenant and landlord have significant considerations when it comes time to negotiate a lease-end extension or renewal. This should be a collaborative effort that acknowledges any challenges and benefits for both parties.
So how does a tenant avoid leaving money on the table when a commercial lease expiration is approaching?
- Be honest with the current landlord and any prospective landlord.
- Conduct a serious evaluation of relocation options to get the best terms:
- Search spaces
- Meet with prospective landlords
- Get construction estimates
- Issue formal requests for proposals
- Prepare a fully loaded financial analysis
- Get feedback from employees and the people who will be affected by the decision.
- Get to know the motivations of the landlords in question.
- Learn the history of any new space being considered.
In other words, go in with eyes wide open and know where you stand. Putting in the effort to evaluate a situation is the only way to determine the true cost of relocation versus renewal. Weighing the pros and cons creates an opportunity to negotiate a lease that makes sense for both sides.
Ryan J. Hartsell , SIOR, MRE, Principal, and Managing Partner of Oxford Partners LLC, focuses on reducing the cost and risk associated with leasing and purchasing office and industrial property. He is recognized by his clients for his attentiveness, market knowledge, and negotiation prowess. He holds a master’s degree in commercial real estate and a bachelor’s degree in finance. As a third generation Houstonian and Principal of Oxford Partners, he has a unique appreciation for the business owners’ challenges by way of his own personal experience, which translates into better representation and empathy for his clients.