Newton’s First Law of Inertia: An object at rest tends to stay at rest.
A Landlord’s First Law of Inertia: A tenant in place is likely to renew.
How likely? It is hard to find precise data although many Real Estate Investment Trusts report that in excess of 80% of their commercial portfolios renew. With those kind of odds, most landlords will presume a low risk of vacancy at renewal time and in-place tenants will be offered less favorable rental terms than a new tenant coming in off the street.
Does a renewing tenant often pay more? Absolutely. These tenants justify it with a number of flawed justifications:
Reason: “We’re still paying less than the Landlord’s “asking” price.”
Flaw: Nobody will end up paying the “asking” price. The only amount that matters is the true market rate, adjusted for concessions such as free rent and improvement allowances.
Reason: “It would cost a lot to move.”
Flaw: It’s probably less than you think, and many firms never actually do the homework to determine the real cost. Further, many prospective landlords will either provide a move allowance and/or a free rent period equal to or greater than these costs.
Reason: “It is a hassle to move and a bad time due to limited staff resources.”
Flaw: The productivity gains that are typically accomplished by improved workspace and layout often reduce facility costs 15–20% or more, and most tasks can be outsourced to relocation firms that specialize in corporate relocations thereby requiring very little staff involvement.
There is a term for this flawed mindset, Captive Tenant Syndrome, which I’ll cover in my next post. Until then, don’t be caught sitting on your hands.
