The right space Featured

8:00pm EDT May 26, 2008

Once you sign on the dotted line, you have committed yourself and your business to a space. Effective industrial real estate negotiations help to ensure you can happily live with your decision for years or even decades to come.

“It’s critical for any type of company — industrial or otherwise — to carefully negotiate and plan its contracts or leases for space,” says Greg Haynes, senior vice president of industrial brokerage services at CB Richard Ellis, Atlanta. “Not preparing leads to poor performance, including potential immediate and future effects on the company’s profitability. While it is virtually impossible to cover every unforeseen circumstance, a carefully designed plan can mitigate mistakes.”

Smart Business spoke to Haynes about how to avoid a poorly negotiated industrial space lease or contract by carefully executing proven negotiation strategies.

What advantages result from effective negotiations?

Certainly, cost savings is considered the chief measurement of an effective negotiation. The tricky part is defining cost savings. Does it mean the lowest cost of occupancy measured strictly by the rate per square foot the occupant pays? Or does it include a much broader analysis, which factors in incidental costs that may not show up in the lease rate? Being an effective negotiator entails much more than locating space with the lowest rate. However, it doesn’t hurt to know where to find bargains. Making sure that they really are good deals is the key.

How can businesses position themselves for success?

Businesses should keep up with the market conditions for their type of space on an ongoing basis, not just the year prior to their lease termination. Although not quite as volatile as the current stock market, the real estate market can have spikes. If you have the flexibility to take advantage of conditions when they are soft, you can experience many happy returns down the road.

If you know you are going to have to expand your space needs within a certain period of time, you might even consider an earlier move if the current market conditions are conducive. Don’t bet your business on a premonition that the current low rates will remain low or will go even lower. Lock in the good deals now.

What leads to the most beneficial agreement?

The most beneficial agreements are ones that are reasonable, fair, planned and allow for the maximum flexibility. The most interaction that a tenant should have with a landlord is the initial negotiation. Knowing your landlord too well may mean that your tenancy is not going as expected and that there were too many unanswered questions going into the relationship.

Choosing the right broker for the assignment can also be critical in the overall success of the process. Companies should interview three brokers before choosing one based upon his or her knowledge of the market and overall real estate expertise. That includes knowing the range of rental rates that a tenant can expect to pay, as well as other associated costs, such as taxes, insurance and common area maintenance. If the market is in a certain rate range, clients should expect to pay a rental rate in that range no matter how good of a negotiator they hire. However, a knowledgeable broker could know why one location is a better long-term choice.

What tactics can increase companies’ control throughout the process?

The best way to increase control is to understand control. One of many ways to exercise control is to set realistic goals and be willing to live with the results. Also, it’s fundamental for a tenant not to give buy signals upon inspecting the space. A good broker can coach a tenant in those subtle nuances. The best way for a tenant to proceed is to make few comments, and ask a lot of questions. Knowing the right questions to ask also saves time. Increasing control is tantamount to increasing competition for your business.

What should businesses never do in industrial space negotiations?

If the landlord senses that you’re out of options for renewal or otherwise or receives other vital information, he’ll stop before he reaches his bottom line and say: ‘We have this deal and don’t have to go any lower or make further concessions in rent or tenant improvements.’ Avoid any potential slip-up by having a central point person for communication with the landlord, typically your broker. You might have the best operations person in North America as your employee, but he or she should never be talking directly with the landlord or the landlord’s broker.

Another key point to remember is that what you clearly see straight ahead is not the likely outcome; but rather, the final result is usually one on the periphery. Stay open and flexible throughout the process. You should always be willing to consider new alternatives that could offer as good, if not better, a result than the ones you originally had in mind.

GREG HAYNES is senior vice president of industrial brokerage services at CB Richard Ellis, Atlanta. Reach him at (404) 923-1436 or greg.haynes@cbre.com.