Looking for Lease Leverage? Start Early.

by | 02 December 2015

If you signed your office lease and then stuck it in a drawer, you are a part of a growing population of business owners who have done the same. It’s easy to do, right? You signed a lease that doesn’t expire for years or even decades. You’ll worry about it as you get closer to your lease expiration.

Fast forward to present time: You are beginning to remember all those voicemails you received from local brokers asking to set up a time to meet to discuss your lease. You get that feeling that you should probably dust off your lease and check the expiration date. You soon realize you only have six months left, but you figure that’s plenty of time to do your due diligence. What you don’t realize is that you’re already at a disadvantage. If you want to be in a position to negotiate better terms, you’ll need leverage.

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The market has changed since you signed your lease. I often speak with people who believe we are still in a recession or down market and that landlords should be giving away space. That’s wrong! Market conditions have improved. Princeton, New Jersey (where I work) has now seen five consecutive quarters of positive absorption in the office sector, which hasn’t happened for at least a decade. Asking rents are also starting to rise. Colliers’ Q3 reports showed an increase of $0.31 per square foot year over year. You want to be in a position of power before the tide starts to turn in favor of your landlord. If you take the proactive approach of looking at space well in advance of your lease expiration, it might prompt your landlord to reach out to you and commence negotiations to renew your lease. They want to grab your attention by offering aggressive rates before you decide to relocate. Why? Because you created leverage.

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Leverage only works if you’re out looking at space well in advance of your expiration. Since your landlord is a sophisticated businessperson, they are in tune with the commercial real estate market (who’s out looking, rents, concessions, etc.). They know that it takes several months to find a new space, let alone negotiate the terms, get permits, go through construction, and so on. If you’re not out searching the market at least six to nine months— or preferably more—in advance of your expiration then your leverage is significantly decreased. You no longer pose a threat that you might leave, therefore your landlord doesn’t have a good enough reason to offer a better deal on your pending renewal. Right now, most markets are only beginning to tighten. Landlords know there are still an abundance of vacant suites that can meet your needs. As the market continues to improve, there will be less and less available space and your landlord will gain leverage on you and will have an opportunity to dictate the terms.

Now, let’s say you happen to find a building that you like. (Dang, now you have to coordinate a move. That’s okay, it will be worth it.) But just like your current landlord, your new landlord knows how long it will take for you to properly schedule a relocation. If your new landlord knows you only have a few months left on the lease, they will know that you have very little negotiating power and they will do their best to dictate the terms. And why not? They are in the business of making money and they have every right to do so, within reason.

My advice? Don’t wait until it’s too late. If you don’t already have a trusted real estate advisor, you probably have several candidates that are either cold calling you or knocking on your door trying to get your attention. Set up a few meetings and get their feedback on your market. Right now might be the optimal time to leverage your market and negotiate favorable terms. Do as our Roman ancestors did and carpe diem!

The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report.

Based in Princeton, N.J., Vinny specializes in tenant and landlord representation for Colliers International, working directly with his clients in the acquisition and disposition of office space. For more commercial real estate insight and trends, follow Vinny on Twitter.