In today’s real estate market, companies
approaching their lease expirations can
benefit from re-evaluating real estate strategies since their last lease agreement.
Large shifts in the Detroit real estate market mean that you may have new or better
options than in the past. And if you’re a
landlord, aggressive strategies and creativity can help keep up occupancy rates and
build tenant loyalty.
“Each relocation or renewal is different,”
says Dan Morse, senior associate with
Grubb & Ellis Company’s Detroit office.
“Regardless of what side of the deal you’re
on, there are opportunities.”
Smart Business spoke with Morse about
the strategies tenants and landlords can
use to maximize their opportunities in
today’s market.
Would you call today’s office market a tenant’s market and, if so, why?
The current real estate environment favors tenants. The state of the economy has
negatively impacted demand for real estate
as corporations have downsized and looked
for ways to find efficiencies in their businesses. As a result, about 2.5 million square
feet has been added to the market since
2003. The increase in supply and decrease in
demand means that tenants have the ability
to benefit from lower rates, bigger incentives and more favorable lease terms.
That being said, landlords have some
opportunities, as well. In these challenging
times, landlords are in a position to work
with their tenants and help them arrive at
long-term solutions. Landlords can build
tremendous loyalty and respect by building
this type of relationship with their tenants.
What strategies do you recommend to both
tenants and landlords in these circumstances?
First, don’t do it alone. Make sure you
have a competent real estate professional
as part of your team. Enlisting such a professional could save you money. Secondly,
tenants should start early. I start working
with companies about 12 to 16 months
before lease renewal or eight to 10 months
before relocation. This additional time allows tenants to think carefully about
their goals, to research their options and to
increase their negotiation leverage.
On the landlord side, I strongly recommend that landlords make every effort to
satisfy their tenants’ needs. Upfront efforts
will prove valuable when it is time to renew
their existing tenant base. Keeping current
tenants will avoid the costs associated with
re-leasing the space or the possibility of the
space being vacant for some time. For
potential new tenants, I recommend creative means to incent prospects to relocate, especially if they have large operations. Bringing in a big company can often
also bring in tenants that work with that
business.
Landlords benefit from maintaining interior and exterior spaces and renovating
facades, common areas, restrooms and
parking lots. If the building has older
suites, I recommend demolishing them to
the shell condition. This allows people to
visualize their build-outs in the interior
instead of rejecting the building because it
looks outdated. Landlords must do whatever they can to separate their buildings
from competing properties to maintain and
secure tenants.
What incentives are available to tenants?
When they talk with their current landlord, tenants can ask about reduced rental
rates and upgrades to their current facility.
Another possibility is to request to relocate
or expand into property held by the same
owner.
In situations where tenants are moving
into another landlord’s building, tenants
can negotiate competitive rental agreements and also ask for base rent abatement
— not having to pay rent for a certain period of time — to offset the initial moving
costs. Companies looking to occupy a new
space can also seek tenant improvement
allowances to adapt the building to best
meet their operational needs.
Why do tenants seek some incentives over
others?
What incentives are most attractive to
tenants depends on their objectives.
Reducing the rent per square foot keeps
fixed costs low. A shorter lease option may
have the most appeal for companies that
may need to expand in the near future. If
they have trouble finding a space that suits
their operations, tenant improvement
allowances may best meet their needs. Or
if they’re relocating, rent abatement that
offsets moving costs could be the preferable option.
Are there any incentives considered a winwin for both landlords and tenants?
Local and regional government incentives benefit both parties. With these programs, the tenant reduces costs at no
expense to the landlord.
Securing these incentives involves sitting
down with government representatives,
reviewing the tenant’s business plan and
discussing how providing incentives to that
particular company can contribute to the
overall growth plan of the state or municipality. The type of industry and number of
jobs created or retained often factor into
the decision to award incentives.
DAN MORSE is a senior associate at Grubb & Ellis Company’s Detroit office. Reach him at [email protected] or
(248) 357-6582.
