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Negotiate a Better Lease Deal Before Market Peaks

Arm yourself with the appropriate information to make rental rate deals before the window of opportunity closes.

Phillip M. Perry (March 2011)
Looking to save money on your lease? Now is a good time to negotiate a better deal.
Despite the improving economy, there's still too much space begging for tenants. That means your landlord may need you more than you need your landlord. And that can translate into lower rents.

The nationwide vacancy rate for industrial space has climbed to 10.4 percent in recent months, according to Robert Bach, chief economist at Grubb & Ellis. That is the highest level since the second quarter of 2004, and significantly more than the sector's 8 percent equilibrium rate (the rate at which rents increase by no more than inflation).

For office space, the vacancy rate has held at 17.8 percent, the highest since the first quarter of 2005 and a hefty margin over that sector's 12 percent equilibrium rate. As for retail space, vacancies have been running at 11 percent, the highest level since the mid-1990s and considerably more than the sector's 6-7 percent equilibrium rate.

Rent Reductions
The time to strike is now. Most real estate observers say that the vacancy rate is roughly as high as it's going to get. In some markets, the trend has leveled off as business owners seek expansions.

"Overall vacancy rates for all commercial property types have peaked and are slowly trending downward," according to Grubb & Ellis' 2011 Forecast.

"The deals are still there for tenants, particularly as you move down the quality spectrum," Bach says. "But for the better properties - well located, strong trade areas, not a lot of competition - landlords can afford to be a little more choosy than they were six or 12 months ago."

Others agree. "While 2011 should continue to be a renter's market, we seem to be at a turning point," says Jeffrey Allen, director of operations at Trendant Consulting. "We expect to see a slow and steady decrease in vacancy rates through the end of the year."

So 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 your renewal date is still a ways off.

Your first thought might be to ask for a reduction in your monthly rental rate. 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 set number of months.

"Landlords don't like to reduce rent," says Andy Fried, director of the Small Business Development Center at Georgia's Coles College of Business. "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.

Do Your Homework
Knowing your market is key to a successful lease renegotiation. Do your research and line up your ammunition. You will want two questions answered: What rents are others paying? And what space is available for you to move to?

Here's where the right help can make all the difference. "The number one factor for successful negotiating is having a great real estate agent," Allen says. "Go with the best commercial agent in your area. That person will know what's negotiable and what's not, and will already have a lot of connections with business owners and will know their issues. It all stems from that."

How do you find the best agent? "It becomes pretty obvious once you start looking around and talking with other business people," Allen says. "Call brokers and ask for the name of their top commercial real estate agents ranked by sales volume. Look at advertised listings and scout around for the `for lease' signs in your area. Whoever has the most signs is often the best agent."
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