This post originally appeared on tBL member Lynn Drake's blog Compass-Commercial Blog | Expert Commercial Leasing Advice and is republished with permission. Find out how to syndicate your content with theBrokerList.
My favorite question: Why won’t the landlord reduce the rent? The building has been sitting there empty for years!
If I had a nickel for every time I have been asked this question, I’d be rich by now. Time after time, people ask me: why won’t the landlord reduce the rent of an empty building? It would stand to reason that an empty space would be a less expensive space, but that’s usually not the case.
Some landlords won’t reduce the rent for a simple reason: they want what they want, and they’re waiting for the right deal. Others have a mortgage on the property and therefore, have the bank telling them the minimum rent they can charge. Some buildings have changed hands multiple times since 2008, and the new owner has enough cash to wait for the right deal. In other cases, the bank took the building over in a foreclosure, and they’re still holding the title.
Believe it or not, some landlords will even take offense if an offer is too low. You have to strike the right balance when putting an offer in a property—and that’s where a good broker comes in. Good brokers understand the market, understand the comps in the area, and can help you put together an offer that makes sense, both for you and for the seller.
Photo Credit: “Graph Of Crisis” by ddpavumba Source: freedigitalphotos.net
To your last paragraph. This is so very true. Its very important for Tenants to have a good seasoned commercial broker working with them. And they need to listen to their agent. If the tenant’s budget is what is driving their counter offer to the landlord vs the SF of the space and a negotiated market you may not even receive a reply. And you are expecting your agent to present an offer that they know will not be countered or at best it would be countered with the last offer the landlord put on the table. So all of their efforts, and the tenant’s have gone for not. If a landlord is asking $17.00 PSF NNN and you see a space you like, but it is more SF than you need and it is a NNN lease vs a Full Service, you can’t offer the Landlord a $9.00 NNN PSF rental rate because you did not adjust your all in budget for the increased SF and difference in rental structure. It is likely that a similar sized space for $9.00 NNN is located in an area and in a building of lesser quality, needing more work, where the tenant does not want to be located. But it meets their budget.
It’s interesting how a seemingly simple topic has many levels. To address just one… I have found that space that sits vacant for a long time is usually not vacant because the rent is not in the right range for the market (assuming the rent is indeed in the plus or minus 10% range). Also true is that tenants (at least office and industrial – I don’t work with retail users so don’t know their motivations) rarely select a location based on the rent. It may sway the selection if all other elements are comparable, but in and of itself even a much lower rent doesn’t seem to make the critical difference. Once selected there may be a strong negotiation around the rent, but that will not be why the property was chosen in the first place.
Why does space sit vacant? A few of the most common reasons are functional obsolescence in the building or premises; site location issues (e.g. freeway noise, views of the town dump); and geographic issues (e.g. being remote from amenities. Occasionally a property owner will not have the cash or ability to finance tenant improvements or building modifications and will not be able to do market deals so the property stays vacant.
Digging a little deeper – when representing a landlord with vacancy my analysis of a tenant proposal will usually show it is better to lease below pro-forma and have the income. Lots of variables but that is generally true. Of course if a property owner is positioning for a sale or refinance they may need to get a certain rent to validate the finances, in which case it may make more sense to get less rent but in the long run get a higher selling price or a larger loan. Finally, I have seen the developer/sponsor partner of a project not break pro-forma, even if it is not realistic, because their partnership interest gets diluted by taking below the projected rents.