Reducing rent when renewing commercial leases 18 to 24 months before lease expiry is achievable – Les Affaires
While Montreal’s downtown office market vacancy rate hovered close to 10% last September, I stated in an interview that this was without any doubt the death knell to the landlords’ market cycle. In a follow-up interview for their “Montreal’s Commercial Property Players” feature section in the “Les Affaires” business weekly newspaper, I added that reducing rent when renewing commercial leases could yield savings in the order of 10 to 35% compared to the cost current rent. This was a pretty bold call on my part, because in the same article entitled “It’s Time to Renew Your Lease”, my competitor preferred to stay on the sidelines, never hinting in the slightest way to a number. Smelling blood, I then made the boldest statement of the interview declaring that rent reductions were possible anywhere from 18 to 24 months before lease expiry, if the lease negotiation process was handled correctly, meaning conducted skillfully and diligently.
Nine months later, space availability downtown now exceeds the 16% mark. Demand for space has hardly abated, but it can’t follow the blistering speed at which new product is being delivered onto the market. After all this is Montreal, not New York. Even if developers are scrambling to lease up vacant space in their new towers, most tenants cannot afford to pay the required price of entry, their business objectives simply cannot justify it.
Reality: Leases aren’t being renewed at automatically lower rates
Obviously the vacant spaces left by those who can afford to take up these new office spaces are creating significant shortfalls for the owners of the former premises. In my view two things are critical to enable reducing rent when renewing commercial leases, even leading some landlords to agree to rent reductions before a lease expires – one is perception, the other is reality. Which is more important? Although the popular perception may be that, due to higher vacancy, tenants whose leases expire will be automatically renewed at lower rates. But reality is surprisingly different. Despite more empty space downtown, most landlords’ representatives are still under marching orders to renew existing leases at the highest rates possible.
So how is it possible for me to claim that rent reductions can be had before expiry of the lease? The Les Affaires reporter initially had trouble accepting the fact. The success or failure of reducing rent when renewing commercial leases, largely depends on a landlord’s perception of his tenant, rather than on the reality of those empty spaces in the building. So if a landlord likely tells you that his vacant space isn’t a worry because he’s also in discussions with several large potential tenants – are you be able to distinguish reality from the perception he’s trying to create ? Do you follow the market closely enough to know the names of those large potential tenants shopping for space as well as the expiry of their leases ?
Lease negotiations are a struggle based primarily on perceptions
To achieve the kind of results I obtain for my clients, one has to change the landlord’s perception of his tenant – a complex task that requires skillful maneuvering over several months. Although the current reality is that there is abundant vacant space in the market and numerous alternatives to relocate just about any business office, highly-experienced landlords will do surprising amounts of homework, conduct in-depth analyses and craft their offers according to the perception of their tenant’s level of sophistication. So any flaw in your claims, arguments, market information or chink in your armor will be fully exploited, opening the door to doing a better deal for his organization. Yes indeed “buyers can be tricked by savvy sellers”. Lease negotiations are a struggle based primarily on perceptions and few realities. Reducing rent when renewing commercial leases is entirely possible and, according to a tenant’s desired outcome, the objective is to adroitly juggle between perception and reality finding the right balance to convince the owner in question. In the coming weeks I’ll discuss the steps required to successfully lead the lease negotiation process, specific to its renewal.