How to Negotiate a Commercial Lease to Secure More Favorable Terms

Guest Post by Matt Giffune, a co-founder at Occupier

With many businesses forced to transition to remote working environments amid the COVID-19 pandemic, commercial vacancies began to rise steadily.

Major employers such as Facebook and Deutsche Bank are embracing flexible workspaces and allowing employees to work remotely, which is no doubt a concession to the preferences of employees around the country. According to a May survey conducted by Morning Consult for Bloomberg, 39% of employees would consider leaving their jobs if they were forced to return to the office — and that number jumps to 49% for Millennial and Generation Z workers.

Occupancy rates have started to even off somewhat in certain areas, but the problem will likely persist — particularly in larger, denser office markets. In addition to the exodus to remote work, companies are searching for lower-cost headquarters locations in Midwestern and smaller cities. As a result, many landlords are more apt to offer lessees incentives, which means now is the time to secure more favorable terms in your commercial lease agreement.

Generally, most landlords are motivated to sign tenants to longer lease terms so that they have stability and uninterrupted income. And for the sake of that long-term security, they might be willing to bend in the short term. With the market at a low point, business owners have more leverage to seek lengthier free rent periods or larger tenant improvement allowances and lock in lower rents, minimizing exposure to price increases as the market improves.

But this doesn’t mean you should enter into talks unprepared — that’s simply not how to negotiate a commercial lease. There are a number of things you should get in order before discussing the terms and even looking for a space. The following are often the best practices for how to negotiate a commercial lease to secure more favorable terms:

1. Enlist the help of a broker.

Negotiating a commercial lease can sometimes feel contentious, and especially when you’re trying to secure more favorable terms. In these situations, experience helps, as does extensive market expertise. That’s where a broker comes in. Given the complexity of commercial lease agreement negotiations, it’s just good business to have someone in your corner who not only understands the ins and outs of the local market, but also has already spent time evaluating similar office spaces. This helps build leverage. Besides, most real estate brokers come to the table with insider information, knowing about off-market opportunities that might be better suited to your operational needs. Usually, the long-term savings you’ll secure on your lease terms will make up for the broker’s fees.

2. Make no assumptions around concessions.

Don’t assume all landlords will be desperate to enter into an office lease agreement on compromised terms. Not every landlord will have the same priorities or expectations. Understand the landlord’s ownership structure and what might motivate them to concede on certain deal points. New York’s Westchester County, for example, has been seeing strong demand for industrial properties, and signs point to a similar commercial real estate trend in the near future, largely due to a stabilization in retail vacancy rates. This might very well lead to greater competition for suitable spaces, allowing landlords to hold out for the ideal tenant and commercial office lease arrangement — with very few concessions.

3. Prioritize flexibility in lease terms.

If this past year has taught us anything, it’s that the business environment can turn on a dime. As such, you want to keep the word “flexibility” in the back of your mind when negotiating commercial lease terms. Pay close attention to your termination options in regard to timing, and notice provisions, expense, and reimbursement of improvement costs. These are all things you’ll want to discuss before signing a new office lease agreement. The same is true for sublease terms, as you should have the right to sublease a space if terminating a commercial lease isn’t included in the agreement. Also, try to lock in multiple renewal options that cap the renewal rate at 90% of fair market rent. This can reduce exposure to rising markets, as well as avoid any disruption in business come time for renewal.

4. Consider the business objectives for the office space.

Your business objectives should weigh heavily into your ultimate site selection as well as your strategy when negotiating a commercial lease agreement. Evaluate both urban and suburban areas while taking certain factors into account, including:

• Employee commute.
• Location of client base.
• Building requirements.
• Building amenities.
• Neighborhood amenities (i.e., restaurants, shops, gyms, and so on).
• Technology requirements.
• Organizational culture.
• Proximity to public transportation.
• Current market rents and concessions.

As you settle on these details, other factors should then come into play in your decision. Consider the necessary length of the lease, whether building a space is a better option, or perhaps whether a flexible shared workspace could be of benefit to your business. Resolving each of these details before even looking at spaces can create an incentive for landlords to attract you to their location and make concessions in a commercial lease agreement. It also gives real estate brokers a much better idea of what you’re looking for, which can speed up the process.

5. Let technology drive the process.

Although lease management software might not seem like a priority investment at first glance, it can improve the entire process in myriad ways and actually position commercial real estate as a strategic asset to your organization. This is especially helpful when using data to make decisions and negotiate. Everything from lease accounting to commercial office lease negotiations can be managed and monitored through a single platform, relieving some of the complexity often involved with commercial real estate.

Planning, as they say, is half the battle with negotiations — especially those involving commercial real estate lease agreements. The more prepared you are, the more successful you’ll be when it comes time to negotiate. Think about your needs, get to know the office market, and rely on a professional broker to find the right space and secure the best terms. The market is down, and now is the time to act.