By DOUG PRICE
There are many variables that affect the success of a commercial real estate lease renewal negotiation: timing, market conditions, supply and demand, representation, the tenant’s needs and several more. Assuming the market is relatively steady and nothing unusual happens at the time of renewal, it is very common for lease rates to go down during a negotiation, not up. However, what ‘should’ happen, doesn’t always. Let’s take a deeper look.
Most leases contain an annual increase that compounds year-over-year from the beginning of the lease term. Those increases often outpace inflation and cost of living increases. This creates a scenario where lease rates climb faster than the economy climbs over a five, seven or ten-year period. The result is an above market lease rate, higher than what the landlord would be asking on a vacant space of the same caliber. By the end of the contract the lease rate is often way-above market.
However, getting a landlord to voluntarily reduce the lease rate back down to a market rate is something few landlords will do. It means they would potentially forfeit tens to hundreds of thousands of dollars over the next lease term. Unless they are forced to or at risk of losing that tenant, reducing a lease rate is not something they will do without a fight.
Another question asked during lease renewal negotiations is, “Are similar concessions available to what you would receive on a new space?” The answer to that question has the same answer as the first. A lease renewal negotiation ‘should’ contain concessions, just like a new tenant would receive. But again, getting a landlord to do what is fair in the eyes of a tenant doesn’t happen without firm negotiation and a strategic plan of action.
Most landlord’s definition of a market lease rate is, ‘the highest they can get a tenant to pay.’ The same is true with concessions. Most landlord’s definition of a market concession is, ‘the least they can get a tenant to accept.’ On the surface it may appear that the landlord is trying to be deceptive but that is likely not the case. It simply has to do with the fact that commercial real estate is an investment. Just like you have investments and want the highest return on your portfolio, the landlord wants the highest return as well.
At the end of the day, most people are looking out for themselves. Even the most gracious people prefer themselves, their opinions and financial incentives when it comes to real estate and what concessions should be given or received. Landlords are no different. They want the highest return as well. The reality is, lease renewal or new lease, the tenant needs to be treated fairly and obtain a market deal with market terms.
This is where an expert commercial real estate agent who is trained to represent healthcare professionals as tenants and buyers comes into play. An expert agent will help you begin your transaction at the appropriate time. Next, they will make sure you fully understand all your options and how to execute on each one. During this process they will invest dozens of hours of their valuable time, while saving you dozens of hours of your valuable time. They will work with you to create a custom real estate strategy with the goal of maximizing your profitability through real estate; while ensuring that your interests are always first and protected.
The difference between a properly or poorly negotiated transaction can impact every aspect of your practice. Make the most of your next negotiation by refusing to be taken advantage of by the landlord in your new lease or lease renewal.
Doug Price is an agent with CARR Healthcare, the nation’s leading provider of commercial real estate services for healthcare tenants and buyers. Every year, thousands of healthcare practices trust CARR to achieve the most favorable terms on their lease and purchase negotiations. CARR’s team of experts assist with start-ups, lease renewals, expansions, relocations, additional offices, purchases, and practice transitions. Healthcare practices choose CARR to save them a substantial amount of time and money; while ensuring their interests are always first. Contact Doug at Doug.Price@carr.us