Uncover your office lease negotiating leverage with these 10 questions

This article was originally published in the Phoenix Business Journal

As a commercial real estate tenant in today’s economic environment, there are many opportunities on the horizon, but you need to know where to look. With the rise of remote work comes a significant rise in vacancies. According to one?report , sublease space is up 200 million square feet or 60% nationally?since the start of the pandemic, and properties on the commercial mortgage-backed securities (CMBS) watch list are rising significantly.?Due to the unprecedented stimulus, landlords have been given a temporary lifeline, but that should all change within the next 6-18 months.

Commercial real estate tends to operate on a lag, meaning that the effects of an economic downturn don’t start to show up in commercial real estate data until 9-18 months after a recessionary period. As indicated above, this lag has been extended by the stimulus infused into the economy.

So, what do you as a tenant need to think about to effectively navigate your office space in these interesting times??Since every situation is unique, here are 10 simple questions you as an office space tenant can ask yourself to effectively navigate your specific commercial real estate situation and uncover your own negotiating leverage in today’s market:

1. Is there a high demand for your type of facility??Knowing how many landlords versus tenants there are for the building you are in will give you a better understanding of supply and demand. Also, take into account the impact of remote work on your space and building.

2. Is your building’s location desirable??Is this a location that is easy for a large number of potential employees to commute to? Would other tenants have a large enough talent pool to draw from? Factors such as these will help you understand how difficult it will be for your current landlord to replace you, and more importantly, how valuable you are to their income stream.

3. How are local demographics changing??Local demographics are consistently shifting, and the significance of these changes to your business depends on many factors. Demographics shift as people get older, as couples become families, as companies move to different geographic areas or as available resources move into the area.

4. Is your building outdated??Just like in the residential housing market, buildings that have been modernized will be more sought after than those that have not.

5. Are there any structural or building issues??If a tenant is looking at a property, issues with clear heights, cooling systems, column spacing, power capabilities, or even an inefficient building floorplate can deter them from moving forward.

6. Is there adequate parking??Does the building have sufficient parking to meet the needs of tenants across a multitude of industries? For example, call centers require a higher density/parking ratio. Office parking is typically allotted to tenants by increments of 1,000 square feet (SF) leased. While the numbers range per market, a parking ratio that works well for most call centers is seven or eight per 1,000 SF. More traditional office tenants with less employee density require less parking and, as such, it’s normal to see a ratio of four or five per 1,000 SF.

7. If the property is a multi-tenant facility, what is the tenant mix within the same building/project??How strong are the other tenants and are they in desirable industries? If another tenant is at risk, that puts you in a better position to negotiate because the landlord is likely looking for stability within their tenant base. For a landlord, losing multiple tenants — especially if it could have been avoided — can be financially strenuous.

8. Who is my landlord and are they facing any challenges or pressure??It makes sense that in order to keep a tenant in today’s market, a landlord should be willing to offer concessions to entice the tenant to extend their lease. However, the landlord is a business owner as well. If the landlord is facing financial challenges, they may not be able to offer strong concessions. If you can empathize with the landlord, you can better understand the limits of what they can offer.

9. What value does your tenancy bring to your building??If you’re a tenant that requires a large footprint, you are likely extremely valuable to the landlord. You may notice that tenants with large footprints can “throw their weight around” and negotiate stronger concessions. The length of the term and the value of square footage are things that bring value to the landlord. For example, if you lease 60,000 SF of premier office space, you would certainly be able to secure greater concessions than a 5,000 SF tenant within the same building.

10. What are the real estate fundamentals within your submarket??How is the market performing within your submarket with regard to rates, vacancies, and industry growth? These key indicators can help you better understand how valuable your tenancy is to the market and your respective leverage.

Whether you’re looking to downsize, relocate or just renew, in today’s market, there are significant opportunities for leverage. Don’t just default into the same terms your previous agreement had in place. These 10 questions will help you uncover just how much negotiating leverage you have to drive cost savings on your next real estate negotiation.