For Commercial Tenants the best way to understand how lease renewals work is to look at how wireless phone companies treat their new customers vs. returning customers.
Phone companies follow a simple rule. New customers get all the good stuff, like free or discounted phones and calling plans with free minutes.
While returning customers get something between nothing and far less. In the cell phone service, it’s an outrage that a renewing customer doesn’t get the same attractive deal as a new customer.
In real estate, a tenant that renews gets even shabbier treatment by their landlord. With a lease renewal, the financial future of the company is at stake, perhaps even its ability to viably compete.
A landlord may give new tenants free rent up front, lower the rent per square foot and the space built out for free.
The renewing tenant gets a kick in the head and a rent hike over his existing lease.
Here’s another question for businesses that have a lease expiring in the near future.
If you knew the manager of a particular supermarket, would you go out of the way to pay 20% more for your groceries? Probably not, but this is the same way that renewing tenants allow landlords to treat them.
It’s amazing how many smart business people will choose to “roll over” on their expiring lease and not become market savvy because the landlord or managing agent is “very nice”.
In fact there are three things that landlords can count on when it comes to lease renewals:
- Tenants don’t like to move. Our research indicates about 80% of them renew their current leases either because they don’t plan or don’t know the process and what it entails.
- Tenants like to negotiate the deal themselves.
- Tenants don’t realize that there’s a way to get the same space for less money on renewals.
There are, of course, many compelling reasons not to move. It’s not only disruptive to business, it’s also costly. Typically moving costs can range from $2-4/sf and up.
Realistically a company should only move if:
- Space is too large or small
- Location is no longer good
- Building services are unacceptable
If these factors don’t apply to your situation, your next step should be to saunter down to the manager’s office or the landlord and renew, right?
Too often, tenants like to renegotiate the deal themselves because:
- Landlords make them feel they’ll take care of them
- Tenants don’t want to upset their relationship with the landlord
- Tenants think they are good negotiators
- Tenants save money on the broker’s fees
Unfortunately for the tenant, landlords view their existing tenants, as a “captive audience.”
Remember our discussion on cell phone companies??
A landlord relies on the fact that most tenants don’t like to move and will contact him about renewing their lease. Landlords also know from experience that Mr. or Ms. Tenant won’t pursue other options or learn about the current office leasing market. Leaving the tenant with no leverage, where they will likely agree to a modest rent increase.
Meanwhile, the landlord takes the commission he would have paid a broker representing you, and charges it back as an expense. Commission is factored into rent whether you use a broker or not! The listing agent will be paid regardless if you use someone or not?
If your rent is a major portion of your overhead, the best way to approach renewal is with a market driven strategy.
While that strategy sounds a bit high falutin, consider that all lease deals are based on what is happening in the market. While it may feel good to negotiate yourself no increase or a minor annual increase to renew your existing $18 lease; the current market is $16 and offering improvements and free rent concessions!