The key to getting the best terms for your preferred space is to not wait too long to start the process. There are many factors to consider, which we’ll cover, but here are some rules of thumb to start:
- The process usually takes longer than expected;
- Having more time is better than having less;
- With more time, you can maximize your negotiating leverage;
- With too little time, you always give up negotiating leverage. While there are strategies for dealing with having too little time, the point is you are better off not being in that position in the first place;
- Timing guidelines based on the amount of space you think you might need, will be discussed later in the article.
More Options = More Negotiating Leverage
It’s all about timing because it’s all about having multiple alternatives – being able to just say no. The alternative is having to say yes, even if you would rather say no. It may seem painfully obvious that usually negotiating leverage increases when you have more alternatives at your disposal. Conversely, usually your negotiating leverage decreases when you have fewer of them. And it takes time to develop alternatives. So the amount of time between when you start the process and when you need or want it to be completed is obviously at the heart of the matter. This post is about helping you to avoid the pain of ending up with a deal that is not as favorable for you as it might have been.
It is difficult to give cut and dried rules for how much time is the right amount, because the circumstances surrounding each transaction can be so varied. But it is possible to discuss the reasons behind the timing issue, in order to gain a useful understanding of what is likely to be too little, too much, and just the right amount of time.
Lease Renewal vs. New Lease
First, let’s discuss the difference between a renewal and a new lease, because the former can present a singular advantage. Chief among the reasons for which you might want to consider a lease renewal is if your space and your building continue to work well for you and you don’t want to go through the hassle of a move if you can avoid it. The timing issue of lease renewals, though, really comes into play if you want to change your current lease while it has a relatively long time remaining before it expires. A lease renewal affords you an opportunity that’s unique in the marketplace, because only your landlord can tear up your current lease, as part of a new lease, whether it’s for the space you already occupy or different space in the same building.
You might not want to tear up your current lease as part of a renewal. (If your current lease is below market, you’ll want to enjoy its low cost until it expires, starting your renewal lease only at the end of your current lease term.) But you should know that’s possible because it presents an opportunity to open negotiations with your landlord long before other landlords will think it makes sense for them to negotiate with you. BTW, in theory, when you negotiate a renewal lease and when that lease actually begins can be separated by years.
Timing of Negotiating a New Office Lease
Now let’s focus on the timing of negotiating a new office lease. It’s important to keep in mind that these ideas can also be useful when negotiating a renewal. Because even if you want to renew your lease, the ideal amount of time to allocate for your project should be enough to comfortably accommodate moving to a different building. This includes:
- space-search & evaluation;
- negotiation of economic terms;
- negotiation of the lease document; and
- the “build-out”, or construction, of your space.
I say ideal, because, even if you think that renewing your lease is the best solution, in order to achieve optimal renewal terms, you will be well served to “go to market” so you can increase your negotiating leverage.
Your landlord might think that your preference is not to move unless absolutely necessary. You do not want that presumption to translate into your landlord negotiating with a dull pencil. If you wait so long that there is not enough time to do everything needed to negotiate an optimal lease for space at another building, your landlord will rightly understand that you have abdicated much of your negotiating leverage. That is another way in which the services of an office tenant-rep can be valuable. Just having a tenant rep signals to your landlord that you are in the market and do have alternatives to renewing. But we have found that holding a strong hand is better than bluffing.
Generally, there’s a relationship between space size and a reasonable lead time to negotiate a lease for that space. Larger spaces have longer lead times. Smaller spaces have shorter lead times. That timing is typically informed by three factors:
- when you need to move in;
- how long a building owner is prepared to wait for the lease to begin after the space has been made ready for you to move in; and
- the time it takes to successfully accomplish the project.
Timing and Size of Space
Let me try to illustrate the relationship between timing and size of space through an exaggerated example.
Real estate developers like leases for very large spaces because they are often a good reason to build a new building. That takes years.
Consequently, users of very large spaces need to start the process of negotiating for their new space years in advance of when they will want to move into it, because their ideal range of alternatives probably should include a new building, whether or not there are existing alternatives available.
Just about the smallest possible office space is what a sole practitioner psychotherapist needs – a single office with a waiting room. If the space a psychotherapist wants to lease is already built-out for that specialty use, referring primarily to soundproofing, it is possible to find space and sign a lease for it within a matter of weeks. This is not recommended, because having so little time does nothing to increase one’s negotiating leverage.
Everyone else is between those polar extremes. This post is about leases that do not involve construction of a new building or the renovation of an existing building, because both are extreme scenarios. We are concerned here with the world of existing buildings, whether or not the space in them is raw or second-generation.
Working Backward to Develop a Timeline
Let’s work backward to arrive at a reasonable time frame for negotiating your lease, which is not even the end of the entire process you should be prepared to navigate.
If you want to maximize your negotiating leverage by having the greatest range of alternatives, from renewing the lease for your current space to leasing other space either in your building or a different building, you have to allow enough time for the space to be built. Let’s call that 3-4 months, barring lead-time for special-order items.
Permitting and Bidding
Except in unusual circumstances, the construction process will not start until a lease is fully executed, signed by both tenant and landlord. Before construction can start, there typically needs to be a building permit. That can’t be applied for until construction drawings have been generated by a licensed architect. Add to the mix the time it takes for your architect to self-certify your project or for the city to issue a building permit, and for the competitive bidding process. These things will take weeks and can take a couple of months.
Building Owner’s Agenda
We’ve just reviewed how the length of the construction process establishes the starting point for adding up the amount of time needed for your leasing process. However, the timing issue of office leasing is strongly conditioned by the agenda of building owners, separate from how long your build-out will take. So let’s look into their minds.
Generally they like having the shortest amount of time between when they sign a lease and when it will commence. And, as above, they are usually interested in that time being shorter if the size of the space is smaller. When you are targeting space that is already vacant, once again, size is a factor that affects timing. If you need hundreds of square feet, some owners will say they don’t want to wait longer than a few months. If your need is in the thousands of square feet, most owners will be happy to wait 6 months and longer.
The timing changes if the space in which you are interested is already under a lease that will be expiring. In that case, the owner will not incur a cost by signing your lease now, then waiting to start your build-out until the current tenant moves out. This dynamic is common, because all building owners hope to sign a lease with the next tenant before the old tenant has moved out. Keep this in mind because often, when that period is unusually short, it presents you with an opportunity to benefit from a form of free rent that’s sometimes referred to as beneficial occupancy. That’s the name for a rent-free period occuring after you have moved into your space, but before the commencement of your actual lease term. The other kind of free rent occurs after the lease term has commenced and it’s simply called free rent.
How Long it Takes to Build-Out Office Space From a Raw Condition
As suggested above, six months is a reasonable placeholder for how long it takes to build-out office space from a raw condition. It can be done faster. If the scope of construction is less than building from raw because some of the existing layout, called the existing conditions, can be reused, then the construction period can be shorter. The smallest amount of construction is paint & carpet, which might be done in a month or less. (Yes, sometimes it’s possible to identify optimal spaces that require only paint & carpet or may not even need that. But this post is about taking the conservative approach to timing and maximizing your negotiating leverage.)
Because your landlord can agree to tear up your current lease as part of a renewal negotiation, in theory you can begin negotiations for a renewal at any time during your lease term. Generally the motivator for landlords is either that they want you to rent more space or they want you to extend your lease. Either one generates additional value for the building owner. In return for that value, the tenant is entitled to receive value. A third landlord motivator would be for you to agree to increase the cost of your current lease, in return for a corresponding value that you might want to receive. I will return to that a little further below, when we discuss the impact of COVID-19, because it may not be as crazy as it sounds.
Ordinarily, it’s a lost opportunity for both fact-finding and for maximizing your negotiating leverage not to negotiate simultaneously with several of your best alternatives. Simultaneous negotiation is not only above board, it is the state of the art and it is expected by landlords. They are very likely fielding negotiations with multiple prospective tenants for the space in which you are interested. Or at least they would like to be doing that!
Office Leasing and COVID-19
The reason that many office tenants are negotiating renewal leases now is because of the special opportunity that negotiating a renewal presents to both the incumbent landlord & tenant. Only they can mutually agree to modify the terms of an existing lease. Nowadays, that is often called a blend & extend negotiation. During the pandemic, most tenants are not interested in leasing more space. But many are comfortable extending an existing lease, which is the other way that an incumbent tenant can provide a new value to their incumbent landlord. In return for that value to the landlord, the tenant is entitled to a value it seeks – near and mid-term cash-flow relief.
If your lease is now below market, your landlord wishes it were not. In return for you agreeing to end your below market rental rate and then agreeing to extend the length of your current lease, that’s the recipe for cooking up potentially a lot of rent relief in the near and mid-term. That part of the math equation is simple. You want to make sure that you receive the amount of free rent relief to which you should be entitled, in return for agreeing to an increase to market-rate rent. What is opaque to both landlord and tenants is what the new rent should be, to which they will both have to agree, for the years that are beyond the mid-term. Here again, the counsel of your office tenant-rep will be useful to establish a basis for those negotiations.
Be Proactive and Start Negotiating Early
As far as lease negotiations are concerned, it’s not just best to be proactive rather than reactive, it is critical! It’s ALL about negotiating leverage.
To that end, I feel obliged to share these guidelines about how much time you should allow, based only on a very wide range of square footage. But, please keep in mind that the best way to determine your ideal timeline is by speaking with your office tenant rep. And please remember that it’s better to have more time than you think you might need, than to have less than you discover you do need.
- If the space you want is in the hundreds to the couple thousand of square feet, allow 8-10 months.
- For spaces in the thousands of square feet, allow 18-24 months.
- Or, if it’s in the tens-of-thousands of square feet, allow at least 36 months.
But, remember that you can open negotiations with your own landlord at any time. And I urge all office tenants to begin to consider what they will do after their current lease expires, even earlier than the time periods, above. Doing so can only be productive. It can not possibly be detrimental.
The Award You Don’t Want to Brag About
This writer was presented toward the beginning of his career with an award. Tishman Speyer, which was arguably the largest office landlord in Chicago in those days, used to throw a lavish annual party at the Four Seasons Hotel for office tenant-reps. They told us that office tenant-reps were involved in the leases for 97% of their millions of square feet of office space. I received the award for the fastest deal of the year, simply because our client came to us shortly before their lease expired and staying in their current space was not an option. You do not want your broker to have to be in that competition!
The only outcome for having less time than you ideally need is to limit your range of alternatives. And we as discussed above, more alternatives usually means more negotiating leverage and better lease terms.
Hire an Expert as Your Fiduciary
Most office tenants are neither interested nor well-equipped to monitor the market for dynamics that might change the balance of negotiating power between landlords and tenants. Fortunately, your friendly neighborhood office tenant-rep can be relied upon to do that. And tenant-rep services are free to tenants.
Remember that the potential benefits of a renewal office lease negotiation can be explored, often long before it will make sense to negotiate with other landlords. Your tenant-rep can advise you on when to consider broaching the topic with your current landlord. That might be productive well in advance of when it will make sense to negotiate with other landlords, because every other landlord needs to deal with the rent obligation of your remaining lease, as part of a new deal. Your incumbent landlord has only a small fraction of that value to fit into a renewal lease. That small fraction is called the unamortized transaction costs remaining from your current lease.
The worst thing that can happen if you have more time than you need, is that a landlord will tell you they are happy to talk now, but they can’t guarantee that a currently vacant space will be available. Generally speaking, the larger the deal, the longer landlords are willing to hold an available space.
In closing, my two pieces of advice are to start early and to engage an experienced office tenant rep.
For 2021, I wish you good health and the most negotiating leverage!