Myth versus Fact on Lease Renewals

It’s human nature to think we know what is best for ourselves and our companies. Renewing a real estate lease is one of those areas where executives tend to think they can rely on their own intuitions, but the reality is that trusting your own instincts when commercial real estate isn’t your expertise, isn’t such a great idea.

You may like your current location, plan to stay, and may even have a long-established relationship of mutual respect with your landlord. A tenant in this situation may think a tenant representation broker isn’t needed.

Whether a tenant wants to stay in the same space, downsize, expand, explore different submarkets or seek concessions such as tenant improvement allowances, it’s important to consider the benefits of using a tenant representation broker.

To shed some light on this issue, Site Selection Group will debunk five myths about renewing or restructuring a commercial real estate lease without tenant representation.

Myth No. 1

I’m doing a simple lease renewal so I don’t need the services of a tenant representation broker.

• The moment you request a proposal to renew without a tenant broker representing your interests, your landlord achieves the upper hand in negotiations.
• A tenant representation broker’s objective is to help you achieve the best possible terms on your lease regardless of whether you are staying or moving.
• When a tenant representation broker takes your requirements to the landlord, it strengthens your negotiating position at your present space.

Myth No. 2

My landlord reduced my rent because of COVID-19 so I feel like I’m getting a good deal.

• We’ve been in a COVID-19 pandemic for more than a year, and it’s an understatement to say the pandemic has up-ended the commercial real estate market. There’s simply no way to know if your new, lower lease rate is a good deal unless you benchmark it against relocation alternatives — essentially checking out what the competition will offer you. A tenant representative can do that legwork for you.
• A landlord’s “best deal” involves a strategy to get you to stay without giving away the farm.
• The simple fact is that tenants currently have the upper hand in the commercial real estate negotiations, and a tenant representation broker experienced in lease negotiations can help maximize the best terms.

Myth No. 3

I trust my landlord to give me a fair deal.

• Interestingly, your landlord still relies on a leasing agent to represent their interest in lease negotiations even though they are in the real estate business.
• Your landlord’s real estate broker has a fiduciary obligation to achieve the best possible deal for the property’s ownership, and, just by that fact alone, cannot represent your best interests. There’s simply an inherent conflict there, and you, as the tenant, are the loser in that scenario.
• The financial implications of a lease are significant and real estate lease transactions can be complicated documents filled with unfamiliar real estate and legal terms. A tenant representation broker can break down the jargon and explain your obligations in the contract in laymen’s terms.

Myth No. 4

My lease doesn’t expire for a while so I’ll have to wait until closer to my lease expiration date to realize savings.

• Even if you have a couple of years left on your lease, it doesn’t mean you can’t get a better deal now as landlords consider lease restructurings as a way to reduce the likelihood of dealing with a vacancy down the road, which is a key concern as some companies move toward remote work and hybrid work scenarios. Depending on market conditions and how much time is left on your current lease, they may be open to a restructuring that could involve a change in square footage, rent terms, or other concessions.
• A tenant representative’s job is to use their negotiating skills and their access to market data to get you the best possible deal. It doesn’t mean your landlord is going to simply roll over and give you a sweetheart deal. They will need to be persuaded to make changes, and that is best accomplished by leaning on your tenant representation broker’s knowledge of the market and their negotiating skills.

Myth No. 5

Engaging a tenant representation broker for a lease renewal will cost me.

• Brokerage fees are already built into your rent. If you don’t engage a tenant representation broker, it doesn’t mean you’ll get that money back.
• Your landlord’s leasing agent receives a larger fee if you don’t engage a tenant representation broker — essentially giving them an incentive to discourage you from using a tenant representation broker. Don’t take that bait.

We hope that debunking these lease myths provides some perspective on the advantages of using a tenant representation broker when renewing and restructuring a lease.

With COVID-19 adding a great deal of uncertainty to the commercial real estate industry, now is an important time for tenants to leverage the expertise of a tenant representation broker to optimize the structure of your real estate commitments while the market is favorable to tenants.