Researching commercial rental rates is more painful than a hamstring pull

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Okay, maybe a slight exaggeration. You won’t end up with any real physical ailments except a headache.

A friend of mine who runs an ad agency in San Francisco called me the other day and said he has a lease that needs renewing in 10 months. He leases 8,000 square feet in a nice neighborhood. His landlord wants to negotiate directly with him. “Let’s work this out and don’t insert a broker in this deal. It will just end up costing you more”, the landlord said.

So my friend asks why he can’t just look at commercial real estate listings online and compare asking rates? And why are so many listings priced as “negotiable”? What is everyone trying to hide?

The simple answer: nothing.

The rate depends on your credit, the length of the lease, the size of the deal, the popularity of the building, the lease that is getting negotiated in another suite, leasing commissions, improvements that you need. And the financial situation of the building/landlord. Let me elaborate on each.

Financial Credit – if you have good credit the landlord assumes less risk and is will to make some concessions. Less than good credit means you’re riskier and the landlord will feel less aggressive to reach for your tenancy.

Length of Lease – as a tenant, if you’re looking to make a long term commitment (defined as more than 3 years) you’re more attractive to landlords. It means less turnover for them and less vacancy. And that’s worth a discount in rate.

Deal Size – small tenants get less attention and perks. Everyone defines small differently. But for the sake of this post let’s define small as under 5,000 square feet.

Building Popularity – there are many things that make a building popular. Most often its the location, condition, and reputation of the landlord/manager. If you occupy a building that has little vacancy and the market is strong, your landlord is not losing sleep over your lease renewal. Sure a renewal is less expensive and easier than landing a new deal. But finding a new tenant is not the end of the world.

Lease Comps – asking rates are not lease comps. Leases that are getting negotiated right now are comps (not the comps from 6 months ago either). But you don’t have access to this info. The landlord probably does. The landlord knows his comps and there’s a good chance he knows of others. As leases are signed the rates change. Because most landlords will change pricing as other leases are completed.

Commissions/Improvements – these costs impact the rental rate. Pure and simple. This is why rates aren’t always published. Think of it like buying homeowners insurance. The price depends on several factors.

Financial situation of the building/landlord – The landlord who is desperate for a deal is not going to broadcast it. It’s better to show a negotiable rate than a discounted rate. And the landlord who’s not desperate for a deal doesn’t have much incentive to quote a rate. They want to evaluate the tenants in the market and hold out for the best. “Call us and we’ll let you know.”

So what should my friend do? Hire a broker. Spend the time finding the right one. There’s a good chance your landlord won’t pay your broker on a lease renewal. Especially if the landlord feels like you’re not going to move. And also if the broker wasn’t part of the first renewal conversation. So you may have to pay the broker yourself. But if it means cheaper rent over the course of a few years, it’s money well spent.

Written by The Rofo Team

September 24th, 2013 at 1:55 pm

Posted in General