How to Do Commercial Lease Negotiations with Real Market Facts

Don’t take a vacant tenancy to the property market without a clear understanding of the rental market facts for the location and the property type. Whilst it sounds a logical process, you can get caught out by the real market facts. The concept gets more complicated when you are working a property in a new area that you are not familiar with.

(N.B. these ideas are also sent out to regularly to our friends in Commercial Real Estate Online Snapshot to help amplify brokerage results…. Get your access here)

So why is this and why this focus? Commercial Real Estate is all about results, and those results are created through a number of strategies and actions on the part of the agent or broker. Everything that we do should be assessed for effectiveness across a number of key indicators.   Leasing is just like that. It is a personal process to be understood and optimized.

Marketing, listing, inspecting, and negotiating are all impacted by local area facts and by your actions. How well do you know the local area? What are you doing with that information?

Local Tenants and Businesses

Most tenants understand what is happening with rents, incentives, and the current lease terms and conditions being offered across a group of local properties. They will have looked at a number of properties and on that basis they are quite aware of offerings, competing properties, rental budgets and recent transactions. They will have a budget that will impact their property choices and negotiations. Get to know what they are thinking and what they can afford. Work with those facts and put them at the center of prospecting, inspecting, and negotiating.

Market Awareness

When the local property market is slow or average from a leasing perspective, you simply cannot let an interested tenant pass by or through the property inspection process without encouraging an offer. So the local market awareness is a big and important issue. Offers are to be encouraged in the best way at the right time.

So there are some things for you to understand and use here when it comes to property market activity and negotiations.

Here are some of the important things to watch for in preparing for a lease negotiation:

  • Time on market – listings will come and go from the market throughout the year. The important thing here is to understand the average time it takes to move a well-priced listing. All things being equal, a good listing should lease in any market providing it is supported by a strategy and dedicated action. That is where the exclusive listing process is so important in commercial real estate leasing.
  • Rental strategies – determine the right rental strategy for the property in its location and by property type. There are different rental methods that will be valuable to consider when leasing or preparing to lease.
  • Incentive types – there will be many types of incentives to consider in use when working with some tenants today. Any incentive offered as part of a lease transaction should not be considered as cost free. The fact of the matter is that any incentive should be costed back into the lease transaction over time.
  • Face and effective rents – understand the differences between face and effective rents as they apply to the location and the property type. Those rents will be impacted by incentives. Most tenants will be seeking an incentive as part of the lease negotiation. The commerce related to the lease incentive should be understood and factored into the deal.
  • Lease terms and conditions – there may be particular issues relating to occupancy that should be merged into the lease negotiation through special terms and conditions.
  • The requirements of the landlord for cash flow and ongoing rental income – determine the requirements of the landlord when it comes to rental growth and outgoings recovery. Are they financially stressed, or can they tolerate variations in cash flow and outgoings recovery?
  • Existing vacancy factors – the property will likely have some vacancy factors to consider and factor into ongoing cash flow. Look at the balance of the tenancy mix and the upcoming lease expires. Understand how the prevailing lease expiry profile and vacancies can impact the landlord into the future. When it comes to leasing an older property, future vacancies can be of great concern.
  • Other market rents in the property and or the street – look around the area to understand what other listings are doing when it comes to vacancy offering, and asking rental. Can you compete against those other listings?
  • The outgoings for the property – a simple assessment of outgoings will help you understand the rental strategies for the vacancy. How will the outgoings be recovered? What rental strategy and structure will be best for the asset? How will that rental strategy compare to the other properties currently vacant in the location?

So there are some good things for you to look at and investigate when it comes to commercial property leasing and the particular negotiation with any tenant. Gather all the facts before you take a property to the market. Make sure the landlord is prepared for the negotiation well in advance, understanding the elements of the property leasing market as it exists today.

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