Companies that renew their real estate lease agreements often pay a premium for the convenience of not relocating.
After all, lease renewals are not conducted on an entirely level playing field; the landlord is in the business of real estate and the tenant is not. With a well-thought-out strategy in place, however, it is possible for tenants to negotiate a discount.
“The tenant that understands lease expiration and relocation can capture savings, which otherwise would be a major windfall for the landlord,” explains Scott Yards, senior associate, office properties for CB Richard Ellis.
Smart Business spoke with Yards about the office lease renewal process, common mistakes that companies make and how to go about getting an optimal lease renewal.
How does the office lease renewal process typically work?
Before the process begins, the first reality that the tenant must accept is that achieving maximum value from a lease renewal is not necessarily quicker or easier than finding, negotiating and moving into a new space. The methodology for companies to strategically work through the lease renewal process can be divided into three phases: phase one is situational analysis, phase two is option development, and phase three is project implementation.
The first phase is for the tenant and its-broker to collectively discuss and understand the tenant’s current and future corporate goals, as well as existing and pending real estate requirements. Secondly, in the option development phase, the tenant must develop building/site alternatives and make the landlord aware they are pursuing them. An aggressive search by a credible real estate professional from outside the company hierarchy is strong evidence that the threat to move is real. In the final phase, project implementation, the objective is to bind both parties to the agreed-upon transaction and to arrange and manage all work necessary for the tenant’s space.
What are some common mistakes that companies make during the process?
Tenants think that because there is no operational need to relocate, the lease renewal is essentially just a straightforward administrative matter. Relieved not to have to address all the operational, logistical and cost issues associated with moving, tenants typically feel they come out ahead. More often than not, however tenants should be getting a discount that reflects the savings the landlord realizes from their decision to stay.
Another mistake that tenants make is entering the renewal process without a clear strategy. Tenants sometimes do not see the renewal as an opportunity to gain a competitive cost advantage, and subsequently do not commit adequate resources to the transaction. Finally, tenants often fail to understand the economics of the renewal situation from the landlord’s perspective.
What specific strategies should be utilized to get an optimal lease renewal?
Time: Landlords know how much time it takes companies to make decisions and how such decisions can be readily delayed. The window must open early enough to convince the landlord that there is time enough to make both the decision and the move. For projects of significance, the process should begin at least two years prior to lease expiration and for very large projects where build-to-suits may be an option, even more time is required.
Objectives: Tenants need to clearly define their objectives to convey a focused approach on the landlord's income stream.
Understanding of landlord: Tenants need to understand the landlord’s position and objectives. Landlords vary by types of investments, portfolios, and financial and risk profiles. An entrepreneurial developer has different objectives than institutional owners.
Credible motivation: The landlord must be convinced that the tenant can find an alternative that meets and exceeds its objective(s).
Credible market search: The landlord needs to be aware of the tenant’s alternatives. An aggressive market search by a leading real estate firm from outside the company is proof the threat to move is real.
How much value can be extracted during the renewal?
It depends on the market, the landlord and the team on the tenant’s side. Tenants who negotiate their own renewals seldom fail entirely. They usually gain some concessions, although they may have little idea what they are worth or what they have received. The landlord will give up only enough to make the tenant happy.
How can a company benefit from engaging a real estate professional to help out with the renewal process?
The importance of strong outside support to plan and execute a renewal strategy cannot be overstated. A real estate professional will have sophisticated knowledge of the market, will be well-versed with the current economics of leases in and around the subject building, and will be familiar with landlord tactics and vulnerabilities.
SCOTT YARDS is senior associate, office properties for CB Richard Ellis. Reach him at (513) 369-1313 or firstname.lastname@example.org.