Commercial Real Estate Negotiation - Good time for Tenants

An Article from the WSJ regarding commercial real estate leasing:

More than two years before his firm's five-year office lease was due to expire in 2013, Robert Finlayson told his landlord he was interested in renewing, but wanted some incentive to stay put.

Mr. Finlayson, a managing partner at Mozley Finlayson & Loggins LLP, a 40-person corporate-law firm in Atlanta, says on the advice of a broker he felt it was the right time to make a deal. After three months of negotiations, he secured a six-year extension at a 20% discount, plus one year of rent at half price, starting in January.

Annual retail-property leases averaged $15.56 a square foot in the fourth quarter of last year.

The firm's landlord, real-estate firm Ackerman & Co., was satisfied with the agreement. "We don't want to see tenants walk out the door, particularly big tenants who have been with us a long time," says Frank Farrell, a senior vice president for Ackerman in Atlanta. "You're trying to renew early because it reduces risk. The costs of a renewal are probably half of what they are on a new deal."

Weitz - A lot of Tenants overlook this in their negotiation - its not easy to re-let a property. Don't be afraid to negotiate at lease renewal.

Small-business owners are seeing opportunities in the soft commercial real-estate market, trying to renegotiate their office, retail and industrial leases for less money. Now, with rental rates even lower than they were during the recession, and the economy showing signs of improvement, more tenants are scurrying to lock in better deals.

"It's a feeding frenzy," says Faith Hope Consolo, chairman of the retail leasing, marketing and sales division at Prudential Douglas Elliman Real Estate, a brokerage firm in New York. Business owners are "concerned that rents will be out of their reach sooner or later."

In the fourth quarter of 2010, annual leases for U.S. office properties averaged $23.20 a square foot, down from $25.02 during the same period in 2008, according to data from CoStar Group Inc., a commercial real-estate services firm in Washington. At the same time, vacancies rose to 13.4% from 11.8%.

The trend was similar in the retail and industrial sectors, CoStar's data show. Annual retail-property leases averaged $15.56 a square foot in the fourth quarter of last year, down from $17.51 in 2008's fourth quarter, while retail vacancies rose to 7.3% from 6.6%. Industrial-property leases averaged $5.47 a square foot in the fourth quarter of 2010, down from $6.28 in the same period in 2008, and vacancies rose to 10.2% from 8.8%, according to CoStar.

Chris Macke, a senior real-estate strategist for CoStar, says the commercial market is more tenant-friendly today than two years ago because it tends to react more slowly to economic changes. But, he adds, "we are already starting to see rents increase in some markets," such as Washington, D.C., and New York.

Data from LoopNet Inc., a San Francisco information-services provider specializing in commercial real estate, show similar figures, with the lowest yearly rental rates per square foot for office space in metro areas such as Rochester, N.Y., ($12.25), Columbus, Ohio, ($12.50) and Minneapolis-St. Paul-Bloomington ($12.54). For retail spaces, the lowest yearly rental rates per square foot are in Oklahoma City, Okla., ($11.08), Buffalo-Niagara Falls ($11.39) and Rochester, N.Y., ($11.58).

But it may be difficult for business owners to renew a lease at a lower rate more than two years in advance of its expiration date, says Wayne D'Amico, president of PropertyPolitics.com, a consulting company to both tenants and landlords in Essex, Conn. "It's easier if the opportunity to renew is close or imminent," he says.

Entering into lease negotiations can also be dicey. "You have to be willing to move," says Nick Balletta, chief executive officer of TalkPoint LLC, a Web-technology firm in New York with 100 employees.

Late last year, he completed a renegotiation of his company's decade-long office lease for six-a-half more years at a 20% discount, plus an initial six months of free rent. He entered into negotiations 13 months before the lease was due to expire and discussions lasted for nine months, during which he considered several other properties.

Mr. Balletta made the move because a broker told him that his company's office building was 30% vacant at the time and several other tenants' leases were up for renewal. "We knew we had leverage for negotiations," he says, adding that his broker helped him seal the deal.

"Let the broker have the hard conversations with the landlord because you have to live with the landlord post transaction. It's kind of like a real-estate pre-nup."

For more information, consider contacting a Seattle Commercial Lease Attorney.

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Weitz Law Firm, PLLC
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