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Commercial real estate markets go boom and bust, but do strategies, practices and trends in handling office, retail and industrial leases shift with these cycles? The answer is yes—and no.

Sure, free rent or increased tenant improvement allowances rise with vacancy rates, and landlords offered plenty of both after the 2008 crash. As the market continues recovering, long-term leases at fixed rates are slowly overtaking short-term leases with expansion rights. Meanwhile, technology and accounting rules are spurring new ways of thinking on the landlord and tenant side—and brokers are in the middle, still trying to get deals done.

Considering these and other factors, it's clear there is no one-size-fits-all strategy on either side of the negotiating table. Each deal has its own set of guiding principles and challenges that tenants and landlords are working to solve. And it's that dynamic that sets the stage for competition among brokers as they race to overcome client challenges, get leases signed, and win new business.

“By nature, commercial real estate is imperfect as one can't look up a ticker symbol to determine market value,” says Alan Kleber, managing principal at Cresa. “Value in our industry has been driven by internal and external influences that are different from building to building. Strategy is heavily influenced by having access to data and how landlords and tenants interpret that data.”

Office Tenants Looking for ROI

Data is top of mind for office tenants and landlords. Strong demand for class A office space is the trend as the market continues its recovery. As class A office fills up and the job market improves, industry watchers expect to see more demand for class B and C properties. Marcus & Millichap expects US office vacancy to decline 80 basis points to hit 15% by the end of 2013. That should drive up asking rents by about 2.5% as the net absorption of about 98 million square feet will far exceed the 52 million square feet of new supply nationwide.

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Despite the positive deal flow, some commercial real estate agents say it's more difficult to finalize leases in today's office market. That's because tenants and their advisors have access to more information that impacts negotiations. Kleber, for one, is spending more time in what he calls the “grey areas” of a deal where both parties can no longer impose the “we have never agreed to that” strategy. At the same time, Kleber says we're in a period of re-creation and innovation for space occupiers across all industries.

“Tenants are seeking to establish returns for their investment in space. The question being asked is, 'What are we seeking as an outcome associated with space and place?' It is common knowledge that tenants are planning more dense work environments and the days of rows of private offices are going the way of the fax machine.”

Playing the Patience Game

Eric Groffman, a senior vice president at Transwestern, takes a contrary view. From his perspective, it is substantially easier to get office leases done today compared to the past 48 months because office tenants see that supply is diminishing and options are becoming scarcer than they were in previous years.

“The biggest challenge when dealing with a large project or large contiguous space is determining if you continue to wait and target larger users or break up space and cater to average demand of 8,000- to 10,000-square-foot users,” Groffman says. “That is always a decision the real estate advisor and landlord need to make together.”

Groffman speaks from experience. With the Total Bank lease at Miami Tower, he says his team came across plenty of deals they could have transacted that would have broken up its largest contiguous space. Ultimately, Transwestern decided to hold off and successfully secured one of the largest, if not the largest, new 2013 office deal in the Miami CBD. Cresa represented Total Bank.

Leasing in the Knowledge Economy

Yvonne Baker, a vice president at Jones Lang LaSalle, says office leasing hasn't gotten any easier or any more difficult to transact. It still takes months to wade through layers of negotiations in most cases. But she agrees with Kleber that the level of sophistication has changed, with more technology driving information.

“The more a tenant rep can learn about ownership entities and how they are structured, the easier it is to get deals done,” she says. “If you are dealing with a REIT, it may offer incentives but rent is really important. You can pound on that landlord all day and the organization isn't going to budge on the rent. So you need to understand who you are dealing with.”

Kleber doesn't expect office leasing trends and strategies to change dramatically in the next 12 months. With limited new office supply, he predicts landlords will continue to work through inventories as a result of steady, but not robust, tenant demand.

“The 2014 tenant activity will primarily consist of smaller users of under 10,000 square feet,” Kleber says. “In general, landlords' preferences are to offer substantial concessions in the form of free rent and tenant improvement allowances without significant reduction in rents, which preserves long-term asset values in the event of a sale. For tenants, there remain pockets of opportunity at buildings lagging occupancy within their respective comparable building set. We are witnessing the stabilization of the office market.”

Handling Retailer Downsizing

On the retail front, MMI points out that the influence of technology, demography, and economic conditions has created sweeping changes in where and how consumers shop. E-commerce now captures more of the consumer dollar and retail footprints are growing smaller.

MMI predicts US retail vacancy should reach 8.6% by the end of 2013, which will drive 2% to 3% effective rent growth. New construction, meanwhile, remains limited and less than what the market is demanding. Do retail real estate dynamics make a mark on handling leasing transactions? That depends, again, on whom you ask.

According to Jerry Welkis, president of Welco Realty and X Team International Partner, the downsizing trend is alive and well as retailers continue looking for ways to maximize sales per square foot.

“Some of these retailers have been affected by the continued increase in Internet sales,” he explains. “A couple of examples are Staples, which has been operating in the 20,000- to 24,000-square-foot range and is now downsizing to 15,000 to 12,500 square feet, and Best Buy, which has been operating in 40,000 to 50,000 square feet and is now looking at stores as small as 30,000 square feet.”

Dealing With Non-Negotiables

In the retail world, getting deals done means finding the right strategy for the right trade area for the right client. Although the most influential factor in a transaction often comes down to the success of the area or the specific shopping center, Carrie Smith, a regional managing partner with Franklin Street, says class A retail space is increasingly hard to come by and tenants will bid aggressively to secure the right location.

“The best strategy for handling retail leasing transactions is to not only understand your client's needs but also the requirements of the opposing side,” Smith says. “In any transaction, there are going to be certain things that each side won't negotiate. If you can understand those items early on, then the process typically will go smoother.”

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Indeed, Patrick Breslin, an executive VP at Studley, says understanding the complete picture helps when it comes to details like finding a space that requires the minimum construction cost. His rule: always be clear about what the tenant wants, the landlord can provide and what the expectations are. Still, he points to several challenges that require skill to navigate.

“Competition, especially for super-premium space, is often a challenge,” Breslin says. “I worked on a deal for months, worked with the landlord to negotiate the asking rents and then at the last minute two additional offers were made. In this case, the landlord can simply choose the highest asking rent from the best tenant.”

Covering the Basics

When Welkis leases a shopping center, he says his team approaches the deal as if they are merchandising the center as a department store. He evaluates what merchandise lines and specialty retail stores are lacking in the community and works to put in the right mix of retailers in the shopping center so there is enough variety to attract customers—the right percentage of apparel stores, restaurants, shoe stores, home furnishings, food stores, grocery stores, etc.

“If we are marketing a retail real estate property, we expose it to the entire retail and brokerage community,” Welkis says. “This includes listings on commercial real estate networks such as CoStar and LoopNet, as well as our website, distributing brochures about the properties to targeted retailers and brokers, cold-calling, canvassing, attending all trade shows and featuring properties in trade shows.”

Keeping Communication Open

Breslin says open communication with brokers and landlords helps to avoid surprises that could kill the deal. He calls retail leasing a business that's about long-term relationships and says he's learned to leverage his relationships to get deals done that benefit his client.

“Now, more than ever, it is important for the tenant to complete a full financial analysis and understand where the business is going,” Breslin says. “Deals take longer and there is a lot of competition. One way for tenants to set themselves apart is strong financing.”

The general consensus is that 2014 will see retailers trying to expand at the same pace as they did in 2013—but quality space won't be as easy to find in many markets. That, Smith says, will force retailers to get more creative with seeking out opportunities in areas that have a high barrier to entry. This will drive a trickle-down effect, causing class B centers as well as the smaller developers who look for retailers to develop in key markets.

Industrial Tenants Taking a Longer View

Fourteen consecutive quarters of declining vacancies in the warehouse sector highlight the US industrial real estate market's momentum. Add to that continued strong leasing velocity and absorption, and 2013 construction levels that have already surpassed last year's total, and the future looks bright for landlords.

According to Cushman & Wakefield, the nation's overall industrial vacancy rate fell to 7.8% in the third quarter. That is the lowest industrial vacancy rate since the second quarter of 2008. John Morris, leader of industrial services for the Americas at C&W, says that “industrial rental rates have been trending up steadily.” So how will that impact strategies, practices and trends in handling leasing transactions?

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Jim Winter, director of industrial services at Cresa, said it's getting easier to get industrial deals inked but tenants are looking at leasing with a longer-term view than they did in the past. Although flexibility is still vital, three- and five-year leases are turning into seven-year leases—and even longer. He calls the Financial Accounting Standards Board guidelines an X factor in leasing any property type.

“If and when it comes out, FASB is going to impact the way companies think about their real estate,” Winter says. “I think many companies will look at the advantages of leasing as opposed to buying real estate. From an accounting perspective, it might make more sense to own the property, depending on their goals and objectives. Of course, leasing is still a great alternative.”

How Retail is Impacting Industrial

Leasing industrial also requires alternative strategies for various markets, according to Steve Medwin, a managing director at Jones Lang LaSalle. Market dynamics in the Northeast are much different than market dynamics in the Southeast, for example, so agents need to handle transactions differently.

“You have to be aware of the fact that each asset, client and deal is different and adjust accordingly,” Medwin says. “You have to be prepared to deal with the more strategic, long-term leads like large build-to-suits while also catering to smaller players in niche markets. Either way, you have to be creative to come up with solutions that meet landlord and tenant needs.”

To some degree, retail is impacting industrial leasing as companies that deal with individual consumers as end-users continue to struggle with handling e-commerce distribution of goods. Adam Petrillo, a managing director at Studley, explains that traditional hardline manufacturers and distributors that rely on e-commerce platforms as one of their sales channels are guessing at the total e-commerce market opportunity for their goods. As a result, he says, they struggle with sizing and locating facilities in their e-commerce fulfillment networks.

“Across the board, most large tenants would like an institutional-quality distribution option, located in close proximity to their customer base,” Petrillo says. “With that said, heavy importers/exporters and local-to-market distributors are looking for additional area on site for trailer parking and container storage. In general, developers over the past 20-plus years have designed their facilities to maximize the size of the building on site, but didn't account for, or anticipate, the distribution needs of their prospective tenants.”

At the end of the day, not much has changed in terms of actual leasing strategies or best practices. Brokers have long sought to gain as much market and client knowledge as possible and have been forced to adapt to market trends and find creative solutions to client problems.

But now there's a new market dynamic. Indeed, as the office, retail and industrial markets continue their recovery, brokers tend to agree: the playing ground is level. In other words, it's not a landlord's market or a tenant's market—and that's not likely to change in 2014.