Covid-19 has turned the world on its head, and commercial real estate markets are feeling the impact. With every deal done a new bar is set. Sublease availability is driving rents down and incentives are skyrocketing. Here’s what tenants need to know going into a commercial lease negotiation
It’s a tenant’s market. And, since these are unprecedented times (at least in the last decade), really, anything is negotiable.
Critically evaluate your future needs, negotiate hard and consider all opportunities before signing on the dotted line.
Let your ideal terms be known:
Hot tip: Unless you already have a tenant-friendly lease, don’t exercise your option. Go to an open market!
When it comes to rent and incentives, landlords and agents will try to lead negotiations with market averages. But the long-term effects of the pandemic are not yet known; the averages are dropping with every deal done.
That means there are no benchmarks.
In the current climate, commercial leases should be negotiated on a case-by-case basis, considering the:
With the future uncertain and vacancy rates rising, landlords will do just about anything to keep or entice good tenants. That’s because, even under normal circumstances, it can be hard to find good tenants. And, with supply now outstripping demand, the current state of events makes things even more difficult.
That means landlords will be willing to talk to tenants, discover what's important to them, offer higher incentives and structure a deal that satisfies their needs.
Pre-COVID, agents and landlords were always putting pressure on tenants to make snappy decisions. But, in a depreciating market, where things will get worse, tenants have the upper hand.
Hot tip: The word “no” is so powerful. Never split the difference!
There are plenty of great options out there. So, if you don’t get the terms you are looking for in your commercial lease negotiation, don’t be afraid to walk away. There’s sure to be another suitable option available, that’s IF the Landlord doesn’t come around.
When negotiating your new lease, be sure to negotiate clauses that protect you now and in the future. Specifically, think about:
By 2022, the vacancy rates in Sydney and Melbourne are forecasted to increase to 13% (they were less than 5% at the start of 2020). So, we expect rents to plummet by up to 40%.
The market is depreciating and is only becoming more competitive, geared further in favour of tenants. That means more opportunities, higher vacancy, lower rents and higher incentives.
So, if you have an upcoming lease expiry, here's how you can leverage the competition:
The best competition against your landlord is to let them think you’re leaving. And, conversely, the best competition against going to market will be the offer you get from your landlord.
Hot tip: Even if you know you want to renew, or relocate, play both sides for the best deal!
Excited by the opportunity but too busy focusing on your business? We execute commercial lease negotiation strategies for our clients – and our clients are always tenants, never landlords.
Contact us to act on your behalf!