Ah, commercial lease renewals. Do it right, and you’ll cut costs while remaining in a trusted space. Do it wrong, and you’ll leave millions of dollars on the table for a property that no longer fits your needs while better opportunities waste away… So yeah, there’s a lot at stake.
And just saying, there’s never been a worse time to lose millions on your CRE than now. So read on to learn the most common issues with lease renewals and what you can do to avoid them.
1. You're Too Comfortable in Your Lease
2. You're Not Leveraging the Market to Renegotiate
3. You're Not Working With a Tenant Rep
1. You’re Too Comfortable in Your Lease
So, you like your space, your landlord is easy to deal with, and your employees are regularly commuting to the office… Sounds like everything is clear for renewal, right? Wrong!
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The curious thing about commercial lease renewals is that they’re often not treated with the same level of due diligence as traditional leases. |
Why? Well, tenants get comfortable in their space and may even have a renewal option already built into the existing lease. Signing on may seem like a no brainier and time-saving option but is one of the most critical errors you can make in commercial real estate.
You must conduct just as much due diligence when approaching a renewal as you would for a new location. Think about it. You’re essentially forging another multi-million-dollar, time-intensive deal. Why should this be treated with any less thorough financial and market analysis than an original lease? Unfortunately, this is one of the most common mistakes when it comes to renewals and will cause you to lose sight of other options (which may provide your best deal).
2. You're Not Leveraging the Market to Renegotiate
Developing sufficient market knowledge goes hand with the first mistake. Unless you’re extensively weighing the available options in the market, there's no way to know whether your deal is actually a good one.
At the end of the day, you don’t know what you don’t know. You may believe that your renewal is the most sensible option, but how can you be sure if you haven’t conducted an extensive cost-benefit analysis of the comparable properties in your (and alternative) markets?
This is especially pertinent now more than ever. The commercial real estate sector is currently experiencing tremendous vacancy rates. According to Bloomberg, leasing revenue has fallen 17% since pre-pandemic levels, and only 30% of pre-pandemic leases have had the option to renew. That means 70% of those leases will be up in the next few years, and with the way the tide is turning, it's overwhelmingly unlikely that most (even half) will choose a renewal. This is going to hurt property owners- bad.
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Corporate landlords are operating on borrowed time right now, and they’re scrambling to retain their earnings. |
In other words, they've never been more willing to negotiate.
We are in the midst of unprecedented vacancy levels, so as a corporate tenant you’re in the perfect position to leverage your power. Consider the surplus space versus the demand, and it makes sense why landlords have never been more desperate. Vacancies are increasing by the day, with even more expected to flood the market in the next few years.
Prepared with this knowledge, you can negotiate with your landlord to reduce your rent to the current market value (which is likely far under what you’re currently paying.) And the way to do this is to create competition for your tenancy. Your landlord will be more incentivized to offer you a better deal if they know that others are vying for your business. Show them that you, as their tenant, can slip through their fingers as their guaranteed income if they don’t come to play.
The perfect storm has brewed for tenants to get a fantastic deal. And if your current landlord won’t give it to you, there are hundreds of thousands who will.
3. You're Not Working With a Tenant Rep
Again, you don’t know what you don’t know. And there’s a lot you don’t know if you aren’t in the real estate world 24/7 (like your landlord and their broker are). The best thing you can do to protect your interests going into a renewal is work with a Tenant Rep.
Tenant Rep experts at iOptimize Realty® have 30+ years of experience launching successful lease renewals. This means we’ve seen nearly everything and are prepared to leverage the factors for your maximum value. If you want to ensure you’re getting the most from a renewal, don’t do it alone. Informed and well-versed support could mean the difference in leaving millions on the table.
Not only will Tenant Reps advocate for your financial interests, they’ll save you about 90% of your time and workload. Consider the care required to properly scour the market and vet properties. Beyond extensive research, a Tenant Rep can find a higher number of properties than encountered on your own or with a conflicted broker. This means sourcing potentially 50 viable locations and conducting back-and-forths with those 50 property owners. Finding viable sites and alternatives, then conducting a thorough cost-benefit analysis of each requires a certain level of due diligence that is nearly impossible were you to take on the task alone.
Tenant reps will walk you through the process of lease renewals, when the best time to renew is, and conduct negotiations with your landlord to ensure you maximize the value of your tenancy.
4. You're Not Thinking Ahead
Don’t wait until the last year of your lease to consider your renewal options. We repeat: do not wait until the last year.
You can start years out from the renewal date, and doing so may increase the potential of you getting the best deal. This is especially true now. We are entering a recession coupled with record-high office vacancy rates. Every professional responsible for their CRE has the potential to be a corporate hero by capitalizing on these trends now.
Read more about how to Prepare your CRE for the Recession.
Don’t wait until your lease is approaching renewal to consider your options. Your team or Tenant Rep should be in the market now to take advantage of the unprecedented low demand for office space and properly make comparisons.
Data Source from the study "Work from Home and the Office Real Estate Apocalypse"
This goes back to the point that creating competition among other landlords will get you the best deal. If you wait until it's time to renew, you’re missing out on the market research and competition development that will improve your deal for the next few years. Essentially, you’re putting all your eggs in one basket when there are a million other unfilled baskets out there.
If you still have several years left on your lease, start thinking about your options. Weigh your space utilization, the percentage of vacancies in the area, and the optimal term length of a lease to analyze where there’s room for improving your portfolio. If you agree to a longer-term now with your current landlord, they can offer you a premium rather than if you wait to renew. And think of it this way: why should your landlord counter with a better deal if they know they have you on the hook?
Put the fear of God in them. If they’re not willing to negotiate to improve the terms, price, etc.- you're out. And in the meantime, you can sublease your space to make back the costs. Remind them of the security that comes with you signing on a ten-year lease now in a time of such CRE uncertainty.
Also, consider the length of time it takes to go through the process of finding new space. You never want to leave yourself without any options. It takes potentially 6-9 months to execute a lease, and then you’re looking at another three months to build out the space. Again, treat the renewal with this same time consideration. This is why, if not now, start conducting market research 24 to even 36 months out before your lease expires to maximize the potential for your deal.
Avoid the Most Common Commercial Lease Renewal Mistakes
Corporate lease renewals regularly leave millions on the table. No business can afford CRE mistakes now, and no professional will survive the reputation of being the one who signed off on an option without doing the due diligence to realize that, a lease renewal done right could've saved upwards of 30% of the existing costs.
Luckily, you never have to worry about that possibility by working with a Tenant Rep. Not only will working with a Tenant Rep save you time and open the door for millions in savings, but it doesn’t cost you anything. This is one of the biggest misconceptions when it comes to Tenant Reps. Their due diligence does not come at the cost of the corporate tenant, so when considering a renewal-it's really no brainer to work with a rep.
At iOptimize Realty®, we are true Tenant Reps. This means we only work for tenants, and because of this,
we can provide unbiased research, negotiation, and guidance to get you the best deal. Don't risk making mistakes in your lease renewal; talk to a Tenant Rep today.
Learn why The Recession is the Right Time to Renew Your Lease.
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