In a recent post, Newtons First Law, we discussed how the “house odds” favor landlords since the overwhelming majority of tenants renew their leases. Why?
Because:
- It is a hassle to move
- Evaluating options would require time and effort
- A move would cause disruption to already stretched staff resources
- It is expensive to move
OK, good points. However, tenants who adopt the above mindset without actually quantifying or verifying those suspicions, are commonly said to be suffering from “Captive Tenant Syndrome” — the mistaken belief that they are being held hostage in their own space.
What if those issues could be minimized or mitigated entirely? What if the design efficiency of the new office offset the effort required? What if the improved morale of an exciting new workplace improved productivity? What if the new landlord absorbed the cost of the move and paid to outsource the coordination the move?
And most importantly perhaps, what would a move cost the existing landlord?
Landlords know that every tenant considers the above bullet points when facing a lease expiration, and they typically count on it to achieve higher profits on renewal leases than they do on new leases.
Remember that, for an existing landlord, a vacating tenant means:
- Vacancy expense in lost rent (often 6–12 months)
- Free Rent to attract a new tenant
- Operating expense carry for property tax, insurance, and non-variable expenses
- Additional vacancy expense during design and construction for new tenant improvements
- Tenant improvement costs (usually significantly in excess of a renewal refurbishment)
I’m not advocating that you put on the boxing gloves and get in the ring with the landlord, my point is simply that there are significant costs to both parties and any extension should be a collaborative effort that acknowledges that both parties might reasonably benefit from the renewal.
So how do you avoid leaving money on the table when your commercial lease expiration is approaching? Here’s what you don’t do: Bluff. A sophisticated landlord can sense a bluff the way a pitbull can sense fear. It’s not that landlords are bad guys (or pitbulls — my apologies to offended landlords or pitbull owners), it’s just that it is their JOB to maximize return to their investors. That means, getting the highest possible rents from tenants. And the low hanging fruit is not in attracting new tenants, it is capitalizing on the ones in place.
So you have to make it real. I know that you may think you want to stay. I know that you may think your preference is a renewal. Perhaps that really is the best option for you. However to get the best terms, you have to make a serious evaluation of relocation options. Not just a check of the Business Journal to get an idea of market rates. Search spaces, tour, meet with prospective landlords, do space plans, get construction estimates, issue formal Requests for Proposals, and prepare a fully loaded financial analysis.
Only then will you know the true cost of a relocation. Only then can you weigh the true pros and cons. And only then will you be able to either negotiate a fair market renewal or decide that the advantages to move may outweigh disadvantages.
