Six tips to negotiate your commercial lease renewal
Lease renewal time presents an opportunity for companies to assess their current position as a renter, revisit the commercial real estate market and use that information to negotiate a better lease agreement.
Lease renewal time presents an opportunity for companies to assess their current position as a renter, revisit the commercial real estate market and use that information to negotiate a better lease agreement. If you position yourself as a well-informed tenant that understands your leasing options and how they relate to the evolving needs of your business, you can ultimately secure a better deal and earn back a portion of your occupancy costs.
Here are six helpful tips to consider during your lease renewal
1. Start early and stay abreast of the market.
A lease is a significant investment. In terms of negotiations, it is beneficial to be proactive rather than reactive. Review your lease on an ongoing basis and approach your landlord months before the expiration date.
Because of the dynamic nature of the commercial real estate market, changing economic conditions may present the opportunity to renegotiate your lease early. Therefore, you should continually monitor the market in order to take advantage of these openings or opportunities for savings. Having more time for negotiation is always an advantage.
2. Understand your landlord’s renewal profits.
As you can imagine, landlords enjoy financial benefits when they renew agreements with existing tenants. When a tenant leaves, the landlord stands to suffer a loss in rent, as well as incur additional expenses needed to make updates or renovations, and market the vacant space.
This presents the opportunity for successful negotiation. But to do so, it is critical to understand the landlord’s current situation, including his or her overall portfolio, and the impact and value your lease has within the market.
It is important to know the dollar amount associated with keeping you on as a tenant and leverage that information to help win back a portion of this profit when renewing your lease.
3. Assess what your space can / should do for your company.
Look at your current space and ask yourself, “What does our company need in order to improve efficiencies and create the ideal work environment?” Some items to consider include amenities for employees, optimal office configuration and updated technology infrastructure.
Once you have identified these needs, include them as discussion points in the lease agreement negotiation. In some cases, your landlord may be willing to incur some of the update costs, if it means keeping you on as a tenant.
4. Research alternatives in the market.
Even if you intend to stay in your current space, take the initiative to educate yourself on other buildings and owners in the market. You may uncover an alternative solution that is competitive and worth exploring.
For example, market conditions and availabilities may have changed since you signed your last lease. Or, other owners may offer different contract terms, less debt, lower taxes or more desirable amenities.
You may choose to move locations or bring these differentiating factors to the table during the negotiation process, creating incentives for your landlord to make you a better offer.
5. Form a plan.
Building off the previous point, do not lead into the renewal process giving your landlord the impression that you fully intend to stay in your current space. If they believe renewal of your lease is guaranteed, this may be used against you in the negotiation process. For example, the building owner could seek less favourable terms, decline your requests or be less inclined to negotiate than if he or she thought you may consider other locations.
Use the tips to formulate a plan that puts your company in a position to benefit from an updated lease agreement. Taking a strategic approach will show the building owner that you have done your research and are able to negotiate.
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6. Consider hiring a broker to help you negotiate properly.
If your company is not familiar with the market and rental negotiations—or doesn’t have someone with the time to properly manage the re-negotiation—you should consider representation through a professional services firm that can help win you the best deal.
As you approach a lease renewal, you might begin to feel like a captive tenant. Take control of the situation by hiring a broker to aid in competitive negotiations. Good brokers are always aware of current market conditions and opportunities and can help you leverage this information.
Engage a broker that adds value, not cost, and that will take time to understand your specific situation and business objectives. This is the only way to have a successful negotiation.
While you may be satisfied with your current space, your company should view this financial investment from all angles and select an action plan that makes the most sense from both business and economic standpoints.
Case in Point: One Client’s Story
This came into play with a recent client who was initially apprehensive to employ a broker. The client had already engaged the landlord in lease negotiations but was unhappy with the outcome.
To fully understand needs and goals, we sat down and talked business specifics. JLL helped the client to realize that they did not need the originally allotted amount of space. With our help, the client was able to renew the lease about six months early, reaping immediate savings. The client was also able to give back a portion of unneeded space, at a 15% lower rate than originally negotiated.
In cases just like these, it is pivotal to know your value in the market—and for your landlord specifically—and leverage it accordingly.