Negotiating Commercial Real Estate Leases In A Recession

The proverbial recitation that real estate is always about location, click location, prostate location holds true when it comes to negotiating a commercial real estate lease, physician but there are other factors to consider when a business is in the market for commercial space.

The challenge of negotiating a fair deal is particularly complex in a recessionary marketplace, according to leasing experts, who are quick to note that companies should bring expert advisors on board.

“There’s so much at stake. Market conditions are constantly changing,” said Kevin Bender, senior vice president of CB Richard Ellis Group Inc.’s corporate headquarters in Los Angeles.

For smaller businesses without real estate experts on staff, the objective of securing a favorable long-term lease can be problematic. Background information about landlords and data about comparative leases aren’t readily available through public sources.

“Many people think that if the square footage costs are good that they should lock in a long-term deal,” Bender said. But the savings might not add up in the if the business flounders.

“In some cases it’s better to retain flexibility rights. Anything that allows you to modify the terms could save you a great deal more,” Bender said.

For new enterprises, current market conditions favor tenants. Joseph Doyle, principal with the Boston office of tenant advisor CresaPartners, said, “It is a great time to be a tenant, without a doubt. Vacancy rates have been rising steadily over the last six quarters.”

Look at the landlord’s financial status and track record, Doyle advised, “The well-capitalized landlords are in a great position because they can offer the cheap rent with the tenant improvement dollars, and in some cases they can offer tenant improve costs that can cover the tenant’s moving costs.” With landlords who are in more precarious positions, Doyle recommends that companies negotiate a “non-disturbance agreement” that allows the tenant to stay in their facility, and at the same rent, if the property is foreclosed.

With vacancy rates up, tenants are in a good position to negotiate lease termination rights on a long-term, perhaps five-year, lease, giving them the option to escape the lease if their growth has exceeded or fallen short of expectations. In addition, for startup companies that have good credit, there is even the possibility of some free rent. “They can push on the rent rather than tenant improvements. If the landlord can get a tenant to come in, giving them six months free rent, knowing that they will be able to collect rent in six months is better than passing on the tenant and having the property vacant for 12 to 18 months,” Doyle said.