Most commercial tenants believe a lease is ironclad: You signed it, you’re stuck with it. Not so anymore. As the recession has taken hold, landlords are now willing to re-negotiate with a tenant and offer incentives for that tenant to stay. Let's call it “Rebates For Renters.”
Evidence from one of the nation's biggest real estate markets, Manhattan, shows just how soft the sector is right now. According to a report released by Cushman & Wakefield, leasing activity in Manhattan fell its lowest level in a decade last year with only 16.3 million square feet rented, a 15% drop from 2008.
The report also indicates that rents fell to their lowest point since the first quarter of 2007, with asking rents at $55.52 per square foot in the fourth quarter of 2009 -- a 24% slide from the high point of $72.97 a square foot in the third quarter of 2008.
Given this tenant-friendly market, there are three common situations in which it might be beneficial for a tenant to renegotiate:
1. The market has dropped, and the tenant wants to get a rent adjustment in his or her favor. This is best accomplished when there is a short term left on the lease, usually two years or less. In this case the tenant is willing to commit to a longer term in exchange for the adjustment.
2. The tenant needs to renovate or do improvements to the space and needs a longer term to justify the capital outlay. The new rent can be higher or lower depending on the market -- right now, we'd bet it will be lower.
3. The tenant needs more or less space and wants to modify the lease to meet their new needs.
Additionally, “some landlords are willing to renegotiate if strong credit tenants are growing,” explains Robert Stella of Cresa Partners. “This is called a “blend and extend/expansion... If a landlord is approaching a loan refinancing deadline, any increase in the income stream for a property will enhance the ability to refinance the loan.”
If you decide that re-negotiating is right for you, here are some guidelines to keep in mind.
- Seek out other spaces and obtain viable bids from other landlords.
- Never accept the initial offer: Negotiate as if it was the initial lease.
- Avoid revealing your interest in renewing your lease to your landlord.
- Refer your landlord directly to your professional representative, or broker, who is best equipped to argue for better terms for you.
Stella emphasizes this last point: tenants need to hire a real estate advisor. “The advisor will evaluate if their current lease is above or below market and provide valuable market information for all options to stay or leave the building,” he explains.
When should you start the process? “Begin the renegotiation process 9-12 months prior to the expiration of your lease. In today’s market, most landlords don’t want to lose tenants,” explained Ira Fishman, president of IDRE Real Estate Partners. “Thus, they are willing to make an adjustment to the rent. If a quality tenant wants to make a longer commitment, it’s in the interest of the landlord to do the deal. Vacant space and lost income are problems a landlord has to deal with when a tenant fails to renew his lease. And since the savings kick in immediately, it’s a great deal for the tenant.”
The bottom line: if your situation is right, take advantage of this soft market. Don't take your current lease at face value -- exercise your right to re-negotiate!
