Going Into A Lease Negotiation? In A Tenant's Market, Here's What We Want You To Know

November 15, 2022
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Commercial Real Estate

Author

Matthew Pollak
Matthew Pollak
Director

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Commercial real estate is on its head. Sublease availability is driving rents down, and incentives have stayed at 2021 highs. 

With every deal done, there’s a chance to set a new bar. 

Here’s what we want tenants to know before entering a commercial lease negotiation.

1. We’re calling it ‘the law of the jungle;’ there are no rules, and everything is negotiable​

It's a tenant's market. And, since these are unprecedented times (at least in the last decade), anything is negotiable. 

Critically evaluate your future needs, negotiate hard and consider all opportunities before entering a lease.   

Let your ideal terms be known:

  • Rents and Incentives: If you've been locked into a lease for the last 3-5 years, expect to pay 20%-40% less than you are now.  
  • Fit-outs & Makegoods: Make the cost the Landlords' responsibility
  • Rent Increases: Given inflation rates, don’t index to CPI. Fix your increases between 3% and 4%.
  • Tenant Representation Fees: Engage a tenant rep to ensure you get the best deal and make the Landlord reimburse you
  • Lease Terms: Give your business the flexibility it needs, but if you can agree to a long-term lease, lock in a great rate.

Tenant tip: Don't exercise your option unless you already have a tenant-friendly lease. Instead, go to an open market!

2. Lease negotiations are now case-by-case  ​

When it comes to rent and incentives, landlords and agents will try to lead negotiations with market averages. But it’s important not to generalise.

Faced with mounting vacancies, many landlords will be motivated to fill holes in their portfolios as soon as possible. But not every landlord is having a fire sale.

To secure the best terms, tenants must find the market soft spots and develop their strategy around landlord motivators. 

Tenant tip: Go in with the knowledge that there are no benchmarks. Commercial leases need to be negotiated on a case-by-case basis, considering the:

  • changing needs of your business 
  • property and its location
  • Landlord’s desperation for a tenant (you may have more leverage within buildings or portfolios experiencing substantial or imminent vacancies)

3. Landlords will go to lengths to retain sitting tenants and secure new tenants ​

Even under normal circumstances, it can be hard to find good tenants. But, with supply now outstripping demand, things have become even more difficult.

That means many landlords are willing to go to lengths to keep or entice good tenants - discovering what's important to them, offering higher incentives and structuring a deal that satisfies their needs.

4. Time is your friend: Be prepared and dare to walk away​

A couple of years ago, agents and landlords were always putting pressure on tenants to make snappy decisions. But, in a depreciating market (where things may get worse), tenants have the upper hand. 

However, even in a tenant-friendly market, it can take a while to source and secure office space or renegotiate well. So if your current office lease is set to expire in the next 12-24 months, start the process early to:

  • Allow yourself the breathing space to get a clear idea of your requirements
  • Give yourself room to engage in a Stay v.s. Go process to make well-informed decisions and create negotiation leverage
  • Ensure you’re not entering negotiations with your back against a wall

Calculating the amount of time you’ll need comes down to the market and your business. But we recommend starting within the following time frames: 

Tenant tip: There are plenty of great options out there. So, if you’ve left yourself enough time and don’t get the terms you want, 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. Remember, the word “no” is powerful. Never split the difference!

5. Negotiate tenant-centric lease clauses

When negotiating your new lease, be sure to negotiate clauses that protect you now and in the future. Specifically, think about:

  • Break clauses - which enable you to end the lease early or assign or sublease your space should market/business conditions change again
  • Lease flexibility - for example, the option to take more, or give up, office space
  • Act of God provision - try to get the words “epidemic,” “pandemic” or “disease” included within an “act of God” or “force majeure” clause to ensure you're covered in the future.

6. Know the Market. Competition is your friend

The average vacancy rates in Sydney and Melbourne are currently sitting at 10.1% and 12.9%, respectively.

But these figures are seriously understated if you also consider: 

  • The large amount of subleasing stock available - Over the past few years, the volume of sublease space in Sydney and Melbourne surged as larger tenants looked to eliminate unoccupied space and cut costs. That means Landlords are now also competing with approximately 96,900 sqm of sublease space in Sydney and 141,900sqm in Melbourne, most of which is quality A-grade stock.
  • The substantial volume of "shadow vacancy" in upcoming lease expiries - With many companies embracing hybrid work models, average office occupancy rates have plummeted. And that means there's a lot more underutilised space in the market today than there was a few years ago. Most of this excess space is unlikely to be offered for sublease because there needs to be more lease term remaining to attract a subtenant, or it cannot be easily sublet. So, many businesses are left paying for space that they will eventually shed when their leases expire.

So, if you’re facing an upcoming lease expiry, here's how you can leverage the competition:

  1. Give your landlord a wake-up call: Make it known that you are looking at other options on the market.  
  2. Don't put all your eggs in one basket: Talking to an agent will only get you access to the properties within their portfolio, and they won't help you negotiate! Be sure to speak with multiple agents/agencies, but remember that they are on the landlord's side. Working with a tenant rep will level the playing field and ensure you have a commercial real estate expert in your corner.
  3. Name your terms: Remember, it's the law of the jungle.
  4. Negotiate, negotiate, negotiate: Don't make a final decision until you have the best position on all your options.

Tenant tip: The best competition against your landlord is to let them think you're leaving. And conversely, the best competition against the market will be the offer you get from your landlord.  So, even if you know you want to renew, or relocate, play both sides for the best deal!

two people having an arm wrestle illustrating competition at the lease negotiation table

7. Talk to Tenant CS

The market is depreciating and becoming more competitive. Landlords are more motivated and more flexible than they've been in years. And is the perfect storm for tenants.

Talking to your landlord and the market simultaneously will improve your negotiation leverage. But the landscape is hard to navigate without an expert in your corner. There's more to negotiate, and tenants must weigh up every suitable option to get the best deal.

At Tenant CS, we execute commercial lease negotiation strategies for our clients – and our clients are always tenants, never landlords.  

Contact us to act on your behalf!

Generating savings for your business is our only KPI

We're market experts, fierce negotiators, proudly independent and conflict-free, securing you the right outcome on the best terms ⁠– every time.
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