It is important for tenants to know the negotiating leverage they have with their landlord when renegotiating their office lease. Below are some expenses the landlord will face when a tenant moves out, and they should be used as leverage when negotiating to stay in the building.
By Peter Shakalis
1) Once a tenant vacates its space, the landlord may have to wait for six months, possibly a year, before another tenant moves in and starts paying rent. In today’s market where good tenants are not lining up to take office space, this is a strong incentive for the landlord to keep its tenant.
2) The landlord will have to give a new tenant from six to eight months of free rent after the tenant moves into the space, depending on what the market demands. Between the vacancy factor and the free rent, the landlord may have to wait a year and a half before it starts to collect rent.
3) The landlord will have to build out the space for a new tenant or give a construction allowance which can range from $40 to $80 per square foot depending on the market and if the building is union or non-union.
4) Also, presumably the tenant has been paying its rent on time and has established a good financial track record with the landlord. It is a known entity to the landlord.
A tenant looking to negotiate a lease renewal must therefore take these landlord costs into consideration and utilize all of its leverage to negotiate for the best terms. These cost savings to the landlord should be quantified and negotiated as a percentage off the market rent for the space, or free rent.
To achieve the best results, the landlord must believe that its tenant will really move out of the building for a better deal, that the tenant is not married to the landlord’s building. This is key and one of the most important roles that the tenant’s real estate agent has in the renewal process. A tenant who has hired an agent to handle its negotiations sends a clear message to the landlord that the tenant is educated on the real estate market in terms of alternative spaces and buildings, as well as pricing in the market.
Peter Shakalis is a Director at Colliers International NY LLC