We bet your initial lease term didn't consider that the way we work would be hit with a tectonic shift, right? Well, you wouldn't be alone. It's not only the way we work that's changed- it's where we're working.
A recent story by Bloomberg claimed that "Remote working has changed the composition of commercial buildings and the value of them." So, what do they predict going forward? The commercial real estate market will only suffer more from pre-pandemic norms as more companies approach their lease renewal option. So, if you're wondering how this will affect you, read on. Existing tenants and those looking for new space may be able to use this unique time in their best interest.
Commercial Real Estate Market Changes
Market conditions of the last few years have brought on a complete disruption to the traditional working models we were used to. Work From Home (WFH) is suggested to bring about an "Office Real Estate Apocalypse." But not so fast. While any crisis may bring about an end for one group, it gives others the opportunity to adapt to the new environment. So, who is positioned to benefit now that office vacancy rates are plummeting? Corporate tenants.
Companies Re-Evaluating the Need for Space
The current pandemic has forced many businesses to re-evaluate their office space needs, and some have even decided to permanently work from home. With companies like Yelp saving millions by completely closing underutilized office space, others are paying attention.
The remote-friendly workplace is incredibly prevalent and isn't likely to leave any time soon. According to Enrique Lores CEO and President of HP, “When I talk to other companies, I think the percentage of people back to the office is lower than 50%… Going forward, this is here to stay.”
A New Environment for Office Leasing
From the beginning of the pandemic to May 2022, leasing revenue has fallen by 17%. While this is a significant figure, it only tells a part of the story. Only about 30% of tenants have had to assess a commercial lease renewal. According to Stijn Van Nieuwerburg, of Columbia Business School,
|
“That means that there’s 70% more tenants that are still sitting on their pre-pandemic leases that are yet to decide whether to renew that lease." |
In the next few years, as an overwhelming number of commercial lease renewals are in question, the lease renewal process is bound to look different. Spoiler: Tenants are in the driver's seat for lease renewal negotiation.
Office Lease Renewal (With a Catch)
If your commercial lease end date is in sight, you have some tough decisions to make. Ditching your office spaces entirely could very well save millions. However, if you're not ready to go entirely remote (which is a valid concern considering the uncertainty of remote continuance), you can get smart about your lease renewal options.
The 70% of tenants still nearing the end of their lease term are likely not looking to renew their commercial lease as they stand. Most likely, the existing lease signed before the pandemic does not account for contemporary spatial demands.
Cut the Bulk in Your Portfolio
As such, tenants who wish to renew will likely plan to downsize. Now is the time to consider where there is bulk in your commercial leases and overall portfolio. For many tenants, cutting space through a right-size analysis is the answer to operating a hybrid-prevalent work environment and still saving money. If your business has unused space, you can improve your utilization now.
While you potentially have the lease renewal option to reduce your footprint in your current office space, it is not the only solution. Renewing a commercial lease is a process that requires a lot of push and pull between tenants and landlords. (That's why it's so important to enter negotiations with a representative who will level the playing field like a Tenant Rep.) Learn why you shouldn't negotiate your commercial lease without a Tenant Rep.
Even when doing a renewal, you should always explore your office space options. Check out our free course on how to find the optimal office space.
Commercial Lease Renewal Negotiations
If you want to downsize during your commercial lease renewal, you will probably be able to do so. Since vacancy rates are high (and sure to only climb more as 70% of leases reach their renewal options), landlords are more likely to agree to favorable terms in the negotiation process. This could mean more free rent (rent abatement), increased landlord contributions for tenant improvements, more desirable amenities, or dropping rental rates.
The specifics will depend on your unique commercial lease agreement and business needs. However, most tenants have the potential to reset their rent to fair market value in lease negotiations. If you've been in your current space for several years, your base rental rate of the initial lease was solidified when demand was high. So, you're already paying more for rent without even considering how much rent escalations are costing you on top of that. To learn more about rent escalations, check out The Perils of a Bad Lease Escalation Clause.
Negotiate for a Better Deal
Your new lease agreement should account for this new tenant-favoring leasing environment with a better deal. That's why, if you have the option, you shouldn't wait to begin the renewal process when your lease expires. Consider renewing your lease early. This is an unprecedented opportunity to capitalize on high office vacancies coupled with an oncoming recession.
Property owners are doing whatever they can to retain their EBIDTA, but they're being hit hard. As a result, your landlord will likely jump for joy if you wish to stay with their commercial property longer. Give them some peace of mind with a longer term, and they may offer renewal terms that cater to your best interest.
Oh, and if your landlord isn't giving you a good deal, there's other landlords who will.
The Opportunity to Relocate
If you are not offered the optimal renewal option, you can relocate to an alternate site or new location. This can be down the street or in one of many business-friendly states which have recently hosted mass immigration of Fortune 500 corporations due to their affordability, lifestyle, and regulatory environment. To learn where these business-friendly states are and whether they could help you save, check out the Four Best States for Business.
|
Bottom line: If you're a corporate tenant, you have a lot of power to streamline your portfolio right now. |
If you're approaching the end of a term, remember during negotiations that you can possibly get your landlord to reduce your footprint or reset your rent to market value. On the other hand, if you're not necessarily at the end, it may make sense to renew your lease early because you may get a better deal from your landlord.
Renewal of Commercial Lease with a Tenant Rep Broker
If you're overwhelmed with the factors of a commercial real estate lease renewal, you're not alone. Determining the right solutions for your business can be a lengthy process (and a stressful one). Luckily, you can work with a Tenant Rep expert who will save you time, stress, and money by taking on CRE responsibility and due-diligence where you need it most.
A Tenant Rep will analyze where the terms and rental rates of your original lease show room for improvement. Then, they execute by adopting a strategic approach to optimizing your leases. This means discovering when (and what) your optimal renewal period is, deciding the terms and price that make the most sense, and negotiating with your landlord to make sure you get the most out of your renewal option. And, if you want to start early, they'll help you forecast.
So, if you're wondering whether a renewal makes sense for your business, talk to a Tenant Rep. They can guide you through any commercial real estate concern your business may have (and even the ones it didn't even know existed). All said and done, they'll help you feel proud if your signature is the one that appears on the dotted line.
If you want to read more about how tenants can work with a Tenant Rep to thrive despite a national financial downturn, check out How to Optimize your CRE for the Recession.
To get started with a Tenant Rep and take advantage of this unique financial time to save CRE $, schedule a meeting now. 
Wondering where to begin?
Related Content
Subscribe to Our Learning Center
