In honor of Back to the Future, let’s talk time travel in commercial lease negotiations…because business decision makers often need it. Many companies wish they could go back and start things sooner or change that one clause in the lease document that they overlooked in haste. Who would have thought that a holdover provision would prove so important in a simple lease renewal? Why does the landlord take so darn long to respond to our counter offers? Maybe we should have just bought a building or built to suit. Unfortunately, options are drying up and Doc Brown’s Flux Capacitor doesn’t exist.
In real life, from a commercial tenant’s perspective, timing is the most critical and telling element in negotiations. Even the most experienced facility and office managers may not list commercial real estate as a core competency, and often greatly under estimate the time needed to negotiate deals appropriately. Time until occupancy (or renewal) correlates directly with the quantity of available alternatives, and with expanded options comes virtually boundless leverage. Savvy business operators (or their assigns) monitor local market conditions and their leasing positions regularly…whether leases are approaching expiration or not. Spotting an opportunity or requirement with 2 or 3 years lead time, a company has options to lease space, purchase buildings, or build pretty much anything they want to from scratch. Options galore and minimal stress.
Conversely, as time dwindles, so do your alternatives and negotiating advantage…and your landlord knows it. For most businesses, anything less than 2 years from expiration rules out build-to-suit options. Inside of 12-18 months eliminates the realistic chance of purchasing a building to occupy. Inside of 6 months means the options you find for lease need to fit just right, because you don’t have time for significant tenant improvements or permitting. If a deal falls through at this stage, you’re really in trouble. Relocating becomes difficult if not impossible in this time frame as well. Anything less means you’re telescoping the negotiation process and leaving plenty of money and business risk on the table. For no other reason other than simply waiting too long, you’re basically resigned to accepting whatever your current landlord offers you.
Timing is also very “telling” for your current landlord. It’s a subtle, but relentless force in renewal negotiations. Even with all the backchannel conversations, strategy, and crafty bluffing you think you’re doing in a real estate deal, you can’t hide timing from your landlord. Landlords often “slow play” negotiations as they understand that the later it gets, the less options you have…thus increasing their odds. At some point, all the strategy in the world leaves you captive and forced to renew in place. You won’t get a reminder from your landlord 18 months in advance of lease expiration to begin looking around for alternatives. You can’t blame them for this…it’s their job to keep you paying rent and maximize returns for their properties. It’s up to you and your team to figure this out.
Even if you have no intention of ever relocating your facilities, the negotiation process and required timing is exactly the same.
Here’s a recommended solution. Like legal counsel or your family doctor, there’s nothing that says you can’t have real estate representation “on retainer” ongoing. You can find an established, proven ethical corporate real estate firm to track important dates, keep a pulse on market conditions and establish performance metrics for you…even if there aren’t any leases coming due for a while. Hire a proven firm now while there’s nothing going on…preferably one that doesn’t represent owners or landlords. If you don’t like what they’re doing, you can just cut them loose.
When it comes time to act, a competent firm (like The Avocat Group) will ensure that you’re signing good leases under fair market terms, and making sound business decisions in the first place. They’ll help you get the timing right and monitor threats and opportunities while you’re busy doing whatever it is that you do. Ongoing, they’ll also track and report on real estate related performance metrics so that you look like the hero. Proactive decisions based on actual data and analysis mean a higher likelihood of success, not to mention job security for you.
As originally posted by Casey Bourque on LinkedIn