PHOTO CREDIT: By Zhukova Valentyna/shutterstock.com
Your lease is up for renewal and you are facing more than 50% increase in rent over your starting rent 5 or 7 years ago. Business is strong but after payroll, your office rent is your largest expense so a significant increase in your rent will have an equally significant impact on your profitability.
This is a typical scenario we are facing with our clients. Our San Francisco law firm client signed a lease five years earlier for a 10,000 square foot (SF) office. Their $27/SF turned into $30/SF with graduated rental increases. Their current year rent was $300,000 but were faced with the sticker shock of escalating market rents on their renewal. What was $30/SF five years previous became $60/SF with the most aggressive landlords asking as much as $80/SF or $800,000 per year for a 10,000 SF office.
As a firm with a longtime San Francisco presence they were reluctant to chase lower rents and relocate out of the City. Relocating would also be disruptive to their staff and taking a step down in class was not an option for a law firm. For these reasons, like many tenants, they preferred to stay in their current location just not with a steep rent increase.
Since their lease was signed 5 years ago, they had implemented some telecommuting and were open to utilizing more open space concepts in their existing space. So, they were already on a path to resizing that would help reduce their rent cost. Their plan was to give back some space and negotiate a lease renewal.
We tell our clients that landlords matter. Good landlords understand the value of a long-term tenant as well as the true value of their space on the open market. And, good landlords really matter when it comes to giving back space on your lease renewal.
The office vacancy rate in the sub-market was in single digits and tightening but the landlord’s building vacancy rate was in the high teens. Despite an above market vacancy rate the landlord was inflexible on resizing. And, the building asking rent was above market. This was not our definition of a good landlord.
Landlords know that ~70% of their tenants prefer to renew their leases and this landlord was playing that card. The landlord soon found out they had overplayed their hand when our client engaged us as their tenant representation broker and put their landlord on notice that they were considering other options. Good tenant representatives maximize leverage for tenants by getting market proposals that will cause potential landlords to agree to the most competitive terms and conditions possible.
So, we created multiple viable options for our client to give them leverage. Our search uncovered several alternatives that were upgrades over renewing their current lease. One of those options turned out to be just a block away in an iconic San Francisco building with one of the top landlords in the City. They were able to maintain their longtime San Francisco presence, in a better building with minimal disruption to staff.
By creating multiple options to maximize our client’s leverage and negotiating with a good landlord that understood the value of a financially sound tenant, we negotiated a below market rent, in a properly sized space, while reducing overall rent from the space they left.