OFFICE TENANT STRATEGIES IN A LANDLORD OFFICE MARKET

There are a number of negotiation strategies which may become increasingly important as submarkets across the county shift from Tenant-biased towards Landlord-biased office markets. This shift is being caused by a number of factors, including almost no new construction for the past ten years, declining vacancy rates, and continued growth in certain segments of the United States office/service industry.

One key strategy in maximizing the office tenants overall negotiating position is to start the renewal/relocation process as early as possible. For typical 3,000 to 10,000 square foot office requirements a nine to six month lead time is suggested. For requirements over 10,000 square feet a twelve to twenty four months is advised unless a build-to-suit is under consideration, and then the lead time may be as long as 24-36 months or more.

Be realistic in your negotiation objectives. The fact that you obtained six months free rent on your last lease in 2007 may have little to do with today’s market realities. The overall Landlord concession package may be diminished, including, less (or no) free rent, less tenant improvements, less changes of Landlord lease language, and less flexibility in options to cancel, expand or contract.

Maximize your alternatives. Your experienced office representative will be able to identify the various relocation and sites. The most experienced agents will creatively produce alternatives others might not have considered. Be willing to consider expansion of your geographical parameters.

1. Early lead time
2. Aggressive but realistic negotiation objectives
3. Maximize alternatives
4. Existing options may be more valuable than you think
5. Free parking might not always be free
6. Actual BOMA building load may go up in a tight market
7. New institutional owners have replaced hip-shooting developers, conservative value-guardians
8. Credit of tenant increasing in importance
9. Type of business will be more important
10. Generic layout will be preferred over specialized build-out

Be aware that the actual players have changed. The majority of hip-shooting, wheeler- dealer developers of the ’80s and 90’s have been replaced by institutional, conservative “value-guardians” who seek to maximize the return of their investment portfolio while minimizing the downside risk. Negotiation decisions may come from “upstairs” for reasons that sometimes may appear illogical and issues previously overlooked might now be in the forefront of importance. The credit of the tenant will become increasingly important. The type of the business will also be more critical to the long-term value of the property. As a project approaches full occupancy the Landlord may become more selective in their choice of tenancy.

In addition to decreasing Landlord-offered tenant improvement packages, specialized layouts may require Tenant contributions up-front to further reduce the investment risk. Generic layout tenants (mostly open- plan layouts) may win out over customized hard-wall configurations.

There may be subtle cost-increasing methods employed by Landlords as the market continues to tighten. In the suburbs much of the multi-story parking has been either free or at a nominal charge. Parking stall rate charges or increased charges are anticipated in low vacancy areas that can competitively get away with this. In the 1980s inefficient building designs with actual BOMA calculated common-area load factors of 15-20% were sometimes artificially reduced to 10-12% for competitiveness. Again, as the market tightens the actual, higher, load-factors might be applied to new or renewing tenants.

It has been an office tenants market for the past 5-6 years, and now the tide is turning once again in favor of the Landlord. A prudent tenant will approach this new market with the appropriate set of negotiating tools, including the assistance of a qualified, experience tenant representative. Good Luck!

Jeff Weil

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