Downturn Highlights Bargaining Strategies

Among other factors that both sides are scrutinizing these days are balance sheets, notes Steve Marcussen, a managing director with Cushman & Wakefield. Astute landlords will not only ponder the tenant's balance sheet, but also the outlook for the industry it is in and its past record of growth, Marcussen says. He adds that it's also important for tenants to know the financial status of the landlord because a building owner who is not well-capitalized may not be able to deliver tenant improvements. "We've also seen numerous examples of class A buildings that are showing evidence of cutting back on maintenance and trash collection," Marcussen says.

Timing of lease renewals is also a crucial factor in today's market because landlords and tenants alike can benefit or lose negotiating leverage as a result of it. "Time is a powerful negotiating tool," says Stefan Rogers of Voit Real Estate Services. He points out that the typical time required to negotiate a 5,000-square-foot lease is about two months, excluding lease review, so last-minute negotiations "are dangerous as you become a captive tenant."

Timing of negotiation is important to landlords and tenants alike, Rogers points out. Since tenant retention is a key to sustaining values, landlords today are more likely than ever to renegotiate leases early, he says, because available spaces can easily sit vacant right now for up to 18 months. Available concessions include several months rent free, moving allowances, turn key tenant improvement allowances and significantly discounted rental rates compared with 18 months ago, he adds.

Christopher Bonbright, CEO of Ramsey-Shilling Commercial Real Estate Services, cites the mind-set that landlords adopt as one of the factors in tenant retention. Psychologically, too many landlords take the position that tenants are their adversaries, Bonbright observes. The effects of this attitude are now becoming readily apparent as tenants trade up to higher-quality, better managed buildings, where leasing rates are about the same as the building they're in," adds Bonbright. "Tenants do not want to feel that they are being exploited," he says.

The same dynamics affecting office leasing are also at play in the industrial sector, according to Craig Meyer, managing director with Jones Lang LaSalle's US industrial brokerage division. Well-capitalized landlords who can accommodate the specialized needs of both big and smaller tenants, Meyer maintains, not only will thrive in the current downturn but also will vastly strengthen their positions for the long term. These special needs, he explains, include lease terms that provide flexibility to expand or contract space requirements, reduce or lengthen lease terms and include adjustable leasing rates.