Going into a lease negotiation? In a post-COVID market, here’s what we want tenants to know
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 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), 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:
- Rents and Incentives: Expect to pay 20%-40% less than you are now.
- Fit-outs & Makegoods: Make the cost the Landlords’ responsibility
- Rent Increases: Start with CPI, don’t agree to more than 3%
- Tenant Representation Fees: Make the Landlord reimburse you
- Lease Terms: Give your business the flexibility it needs, but if you can agree to a long term, lock in a post-COVID rate.
Hot tip: Unless you already have a tenant-friendly lease, don’t exercise your option. 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 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:
- needs of a business and how it has been affected by COVID
- property and its location
- landlord’s desperation for a tenant.
3. Landlords will go to lengths to retain sitting tenants and secure new tenants
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.
4. Time is your friend: Be prepared and dare to walk away
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, 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.
5. Include tenant-centric COVID lease clauses in your Lease
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 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. In this case, if there were another forced CBD closure, you should be entitled to a rent waiver, and the landlord would have to ensure proper cleaning and the right policies for safe travel within the building.
- Building Outgoings for COVID cleaning – COVID could stick around for decades. Do you want to foot the bill if another tenant in the building isn’t undertaking proper cleaning? You can’t control who your neighbours are, but you can control your outgoings. Make sure the Landlord apportions costs to the tenant who is to blame (or at least not to you!).
6. Know the Market. Competition is your friend
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:
- Give your landlord a wakeup call: Make it known that you are looking at other options on the market.
- Don’t put all your eggs in one basket: Talking to an agent will only get you access to the properties that they have access to, and they won’t help you negotiate! Be sure to speak with multiple agents/agencies. Keep in mind that they are on the landlord’s side.
- Name your terms: Remember, it’s the law of the jungle.
- Negotiate, negotiate, negotiate: Don’t make a final decision until you have the best position on all your options.
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!
7. Talk to Tenant CS
Excited by the opportunity but too busy focusing on your business? We execute lease negotiation strategies for our clients – and our clients are always tenants, never landlords.
Contact us to act on your behalf!