Leverage the Market for Success: How to Prepare for Your Next Office Lease

In this article, you'll learn:

• How to leverage current low office rental costs to secure better deals.
• The importance of analyzing occupancy and vacancy rates in selecting markets.
• The shift towards premium office spaces and how it affects lease negotiations.
• Essential safeguards to include in leases to protect against landlord defaults.

Your tenancy doesn’t exist in a void.

From the tidal wave of CMBS loans about to hit the market to the ever-changing hybrid work model, there are innumerable factors that will play a role in the landscape of your new lease. And there’s never been a more critical time for corporate tenants to consider the influence external factors shape the eventual terms, location, and price you pay for new office space.

Because we're not just dealing with recessionary symptoms like high interest rates and inflation, work from home has fundamentally shifted the need for office space. And as a result, vacancies have reached never-before-seen levels across the country, making 2009 seem like an inconvenient blip compared to the current full-blown Office Apocalypse.

And now, this is a once-in-an-era time to make or break your commercial real estate portfolio.

Since offices have largely become liabilities due to stalled occupancy rates, high interest rates, and about a million other circumstances stacking up against them, tenants need to tread lightly.

For those planning a long-term office lease, taking advantage of low costs now can save big money in the future. Because landlords have never been hungrier for business, giving you an opportunity to swoop in and use the tenant-favored market for leverage.

Tenants (under the right guidance of True Tenant Reps™) are negotiating their optimal leases and square footage for a fraction of what they would have paid pre-pandemic. Lower rent rates also mean you can get bigger spaces, better locations, and or more amenities for a better price. So let's discuss how to leverage the market and your position to secure your optimal office lease. 

Look at Occupancy and Vacancy Rates

But there’s not uniform opportunities across the board. Some markets are more poised for success than others. And what you should be looking at to clue you in on the full dynamics of an area is the interplay between occupancy and vacancy rates.

When vacancy rates represent purely empty space, the occupancy rate measures the percentage of rented office space that is actually being utilized and occupied by workers. It is so critical in a hybrid-friendly leasing environment because, unoccupied space becomes vacant space as soon as the lease expires.

Examining how the two bounce off each other will clue you in on which markets are viable for your business and which are on the brink of a crash.

The office markets experiencing higher rates of success (in terms of occupancy and vacancy rates) are in the Mid-Atlantic and Southeast. These regions contain notable business-friendly states like Florida, Texas, and Tennessee. They have also notable experienced a quicker and more robust return-to-office than the Northern region, driving the overall higher occupancy rates.

Note the occupancy and vacancy rates for office space across the country. 

The Trend Toward Premium, Streamlined Footprints

And since they’re still emerging markets, you can get more premium spaces for a fraction of what you would pay in NYC or San Fran. In fact, the interest for commercial properties in tertiary markets is higher than ever.

Because the other trend taking place in the office market is an overwhelming preference for premium spaces. Businesses are more willing to funnel CRE dollars into these spaces because enabled by a hybrid environment, they are slashing footprints. Rather than take up spaces the size of past leases, companies are downsizing and investing in more upscale, fine-tuned properties.

Of course, this has driven up the demand for Class A and Trophy Class properties while subsequently devaluing the rest of the lot. Class B and C properties have been labeled as “completely obsolete” by mega-landlords like Scott Rechler of RXR who continued that…

So be prepared for there to be more demand if you’re looking among higher tier buildings. On the other hand, if you’re willing to invest in a prospective buildout with a landlord of an older property, you may be able to negotiate a much lower rate along with concessions like a hefty TIA allowance. Outdated properties have to be renovated or they will lose interest entirely so their landlords may be willing to work with a tenant in the build-out.

The key to remember is that a tenant with extensive knowledge of the average asking price in their market, vacancy rates, and other market-specific information is a tremendously strong force when it's time to negotiate with landlords.

Protect Yourself Preemptively With Leasing Safeguards

Since there is so much risk in the leasing environment for tenants, investors, and landlords alike, there’s no room to take any chances.

Beyond considering the market dynamics, commercial tenants should also be considering how to protect their interests should the other shoe drop and their landlord can’t provide what they promise. Major landlords are defaulting rapidly, and the issue is set to be amplified in the next two years as the vast remainder of pre-pandemic leases approach their expiration. With dismal occupancy rates, it’s likely that struggling landlords will falter even more and have no choice but to hand their keys back to the bank.

But what happens if you’re in the middle of your office lease when your landlord reaches their breaking point and a receiver steps in? Well, nothing good if you didn’t protect yourself before signing.

There are proactive steps tenants can take to ensure that they are not left up the stream without a paddle.

First and foremost, before you sign your lease and if possible, audit your landlord’s financials.Historically, they’d loathe to provide them but if you're big enough or a name brand, you might find them more willing to provide today than in the past. Many tenants are even refusing to negotiate with landlords until they get some proof that the property owner or their lender has the financial capabilities to carry out a long-term lease.

Working with landlords of stronger financial backings leaves you less vulnerable, but identifying the state of their finances requires doing your due diligence and conducting research on their current and projected stability. And it is crucial to identify which office buildings are at higher risk of becoming casualties of the office apocalypse especially as delinquency is rising month over month, to reach the highest it’s been since 2021.

Beyond this, tenants can negotiate for protections in their lease. This includes self-help clauses that empower them to upkeep essential services at the landlord’s eventual expense. The self-help clause is critical because it will allow you the tenant to take over for the landlord if they can’t (because the building is in receivership) or won’t perform certain key services. Remember that when a building is in receivership, the receiver's primary duty is to prioritize paying the mortgage. Consequently, other bills become secondary, leading to a potential decline in services in such a building.

To further mitigate financial risks tenants can also put Tenant Improvement (TI) allowances into an escrow account. This can be a smart move for tenants to protect themselves, ensuring that their renovation costs are safeguarded in case the landlord is unable to reimburse them or fulfill promised improvements. 

Everything will come down to negotiation and the leverage you bring because landlords are often unwilling to immediately concede to self-help clauses, etc. because they limit the landlord’s authority. So, your bargaining position has to be extremely strong. For the right credit-worthy tenant or right sized footprint, landlords will be willing to negotiate because there's more empty space than tenants looking for new leases. So, bring your knowledge of the market or your True Tenant Rep™ who can handle everything for you.

As the market favors tenants with higher bargaining power, True Tenant Reps™ use their extensive negotiation skills to achieve the most advantageous deals for their clients. They can capitalize on the increased office vacancy rates to secure premium space at affordable rates, all while ensuring that tenants' needs, and preferences are met.

Get Your Best Lease With a Tenant Rep

Overall, it is clear that the commercial real estate industry is experiencing significant changes, and landlords and investors must stay aware of these trends to navigate these challenging times.

In this dynamic landscape, True Tenant Reps™ emerge as crucial allies for corporate tenants seeking to navigate the complexities of the commercial real estate market. As experts exclusively representing tenants, True Tenant Reps™ have their fingers on the pulse of the industry and can offer valuable insights and guidance throughout the entire leasing process.

The current market is more favorable than ever for corporate tenants looking to negotiate a great lease. With the increasing office vacancy rates, landlords are being forced to lower costs in order to stay afloat. This presents the perfect opportunity for companies who are looking for a larger space or bigger footprint - they have the power of negotiation on their side. 

Overall, the office leasing landscape presents a unique window of opportunity for corporate tenants, and True Tenant Reps™ are the key to unlocking its full potential. With their unwavering dedication and expert knowledge, they can empower tenants to make informed decisions, capitalize on favorable market conditions, and secure the most advantageous leases with confidence. As the commercial real estate landscape continues to evolve, having True Tenant Reps™ by their side ensures that corporate tenants can navigate these changes and emerge stronger and more prosperous.

Learn how True Tenant Reps™ find the best office for the best price in the free course below.