How to Successfully Negotiate an Early Office Lease Renewal

January 21, 2013

Lance Leighton

Co-Founder – HedgeFundSpaces.com
Senior Managing Director, Savills
New York State Licensed Real Estate Salesperson

Call 212-326-8668

The Most Important Aspects of Negotiating a Favorable Office Lease Renewal

Office space: It is the second largest expense that every company has to consider trailing solely behind payroll.  However, this integral component of a firm’s bottom line is often neglected until six to twelve months prior to lease expiration.  What most executives fail to realize is that the majority of New York City landlords will entertain an early renewal, with market concessions, well before the commitment is contractually slated to terminate.  In order to effectively renegotiate the firm’s obligation, it is crucial to become educated on the marketplace, acquainted with the leasing process and remain leveraged throughout the entire discussion.

If your existing landlord approached the firm for an early renewal, how would you recognize a fair market deal?  The simple answer is that you wouldn’t.  Let’s be honest… Most C level executives are not office leasing experts.  Their sole responsibility is to maximize the company’s profitability; not to stay abreast of every real estate transaction being signed in their area.  As a result, most managing principals are not privy to the concessions that the real estate market is yielding.  Consequently, landlords tend to exploit undereducated and unrepresented lessees during lease re-negotiations and renewals.  (Exploring renewal options?  Click here to contact us for a free consultation.)

An office lease has many components besides base rent that influences the economics of a good deal.  For instance, free rent, tenant improvement allowance, electricity, escalations and flexibility are key elements that can often be renegotiated.  Additionally, New York City office space landlords tend to GROW the rentable square footage by significant perentages- which can often be negotiated as well.  In order to capitalize on such aspects of the deal, it is imperative to become knowledgeable on the marketplace.  In an effort to make an informative decision, it is recommended that the occupant becomes familiar with availabilities in similar buildings.  This process includes hiring tenant representation to assist in determining the size requirement, setting geographic parameters, forecasting an annual leasing budget and analyzing the ideal lease duration.  The goal of this procedure is to align the company’s growth strategy with its real estate obligation.  Without exploring comparable availabilities and familiarizing themselves with competing landlord’s allowances and concessions, it is nearly impossible for an end-user to decipher a good lease renewal from a bad one.  After touring similar and competitive spaces, tenants will be able to determine relative value, which is a crucial factor for building leverage.

By definition, leverage is the ability to create an advantage by exerting power or influence towards a decision.  When re-negotiating a lease commitment, the end user creates leverage by identifying several viable relocation alternatives.  The more practical solutions the tenant has, the greater amount of power they will possess during the negotiations.  In an ideal world, the end user will submit proposals to multiple landlords and create a bidding war for their tenancy.  All things being equal at this time, economics will dictate the final terms of a deal.  However, it is important for tenants to be aware of building agencies during this process. 

Typically, building owners hire third-party agencies to market and lease vacant office space.  These agencies, known as full-service brokerages, create inherent conflicts of interest in office leasing transactions.  Most full-service real estate companies derive the vast majority of their income’s representing and servicing landlords.  As a result, they take a bullish stance on the marketplace and will often encompass a landlord-centric viewpoint.  When a tenant works with a full service brokerage firm, it is imperative to be aware of this intrinsic dilemma.  Additionally, leverage in the marketplace is mitigated when working with a firm of this type due to the substantially less number of choices untainted by their agency.

The most successful way to negotiate a lease renewal is to hire a broker who advocates solely on behalf of tenants, with a specialty in the your industry.  This will eliminate all conflicts during the negotiations and create the maximum amount of leverage.   Due to the fact that tenant representatives specialize in getting their client’s the best deal, they are intimately familiar with market concessions and landlord incentives.   When choosing a broker, it is essential to work with someone who understands the respective business, comprehends the requirement and is proficient in the submarket that the tenant is exploring.

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