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How to Negotiate a Better Lease

If there's any silver lining to our dark economic cloud, it has to be the attractive leasing deals many business tenants are enjoying around the country. Here's how you can take advantage.

Phillip M. Perry (Oct/Nov 09)
For the first time in many years, tenants are in demand. It's no secret why: There's too much space around for the number of active businesses. No one likes to see anyone shutter their doors, but the fact remains that for every business that closes, some more space comes onto the market.

"Thanks to the current vacancy rates, tenants are seeing the biggest selection of space and the most accommodating landlords since the early 1990s," says Robert Bach, chief economist at Grubb & Ellis, a commercial real estate services and investment company based in Santa Ana, Calif. "Landlords are nervous, so tenants can get better deals."

All sectors of business are benefiting. In recent months, the nationwide vacancy for retail space has climbed to 9.5 percent, the highest level since the mid-1990s, says Bach. That's considerably more than the sector's six or seven percent "equilibrium rate"- the rate at which rents increase by no more than inflation. For office space, the vacancy rate has been running at 15.6 percent - the highest since the first quarter of 2005 and a hefty margin over that sector's 12 percent equilibrium rate. About 9.5 percent of industrial space is unoccupied, the highest since the second quarter of 2004 and much more than the sector's eight percent equilibrium rate.

For anyone grappling with a tough selling climate, all that empty space translates into a stronger negotiating position come lease renewal time. "It is a tenant market right now," says Sharon Kahan, first vice president of CB Richard Ellis, a Chicago-based retail specialty brokerage. "If you are a tenant then you are in a good position. There's quite a lot of space on the market and probably more still coming."

Negotiate Your Rates
What steps can you take to capitalize on the favorable market? For starters, dust off your lease and take a fresh look at the numbers, even if the renewal date is still some time down the road. "Business owners should be seeking relief right now from their landlords," says Andy Fried, director of the Small Business Development Center at Kennesaw State University's Coles College of Business in Kennesaw, Georgia. "If the market is a whole lot lower than what's being paid on a given lease, negotiations should be initiated."

Maybe your first thought is a simple reduction in the monthly rental rate. And while that's not out of the question, another tactic is more likely to bear fruit with the same bottom line results: free rent for a determined number of months. "Landlords don't like to reduce rent," says Fried. "Many landlords buy real estate for investment purposes, so they want to keep what they call the `capitalization rate' up. The higher the rent roll, the higher the value of the building." To maintain their investment landlords will often opt to grant free rental months rather than cut the official rental rate.

In fact, throughout the country many tenants are now routinely asking landlords for free rent as well as reductions. "This trend is new," says Bach. "I have never heard of this happening before at such a wide scale." So how many free months can you get? "It varies by area," he says. "The tenant must check around the market to see what deals are being offered." Bach has heard of some tenants receiving six months free rent.
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