Not long ago, an office landlord would reach deep into his pockets to keep a tenant whose lease had come up for renewal. Today, many tenants are finding nothing more than a hard-nosed stare as they gaze across the bargaining table.
With many tenants out shopping for space and few vacancies available, particularly for larger tenants in prime San Fernando Valley commercial areas, landlords are no longer willing to offer the rent concessions and other "freebies" they once doled out in order to keep long-term tenants. They would rather let a tenant walk than make a deal that is less lucrative than what they could get with a new tenant.
"It doesn't make sense from a business standpoint to do a deal that is not at market (rate), and that's probably true in any market," said Michael VanderLey, a principal at Sagamore Equities LLC.
His company recently renegotiated a lease with GTE for about 60,000 square feet of space in its Westlake Plaza Centre building. GTE is the building's largest tenant, but Sagamore had crunched the numbers when it bought the Westlake Village property last summer, and officials were confident that they could fill the space quickly if GTE chose not to renew.
When GTE signed its original lease in 1985, the deal included an option that would have allowed the company to renew its lease for less than the current market rate, which averages about $2.25 a square foot per month in the Westlake Village area. However, the option also stated that the building owner would not have to make any tenant improvements modifications made to the space to accommodate an individual tenant's needs. And GTE's space needs had changed considerably since it first occupied the building.
It took less than a day for tenant and landlord to reach an agreement that raised the rental rate to the market level, and provided some tenant improvements that Sagamore would likely have been forced to offer to a new tenant anyway.
"We wanted them to stay," said VanderLey of San Francisco-based Sagamore. "A tenant of that credit caliber doesn't come along every day. On the other hand, from an economic standpoint, the market (is now) quite a bit different than when GTE originally signed up for the building."
Tenants renewing long-term leases have, through much of the 1990s, expected renewal terms at rates somewhat below the market rate. That's because in soft markets, landlords worry that it may take years to refill a space left vacant by a tenant who did not renew, and the rent increase they might get from a new tenant would not compensate for the revenue lost during the down time.
Landlords also wanted to be certain they were offering competitive prices at a time when many building owners were offering cut-rate deals because they were trying desperately to fill up their buildings. The result was typically rock-bottom lease rates, periods of free rent or assorted tenant improvements, or a combination of all three.
But with vacancy rates in many parts of the San Fernando Valley at single digits, and many prospects knocking on their doors, landlords figure that vacant spaces are not likely to remain empty for long. And even if a tenant does find a suitable alternative, the price tag will be considerably higher than the terms of renewal in most current tenants' leases. Coupled with the expense of moving, most tenants would rather stay put.
A recent renewal in Encino is a case in point.
The tenant, who has occupied about 13,000 square feet of office space in the Encino Atrium, recently came out of a lease renewal negotiation paying about 20 cents more per square foot, monthly, than it had expected to pay going in.
"When you take into consideration what it was going to cost (the tenant) to move, the landlord played it right (by holding out for a high price)," said Paulette Toumazos, vice president of office services at Daum Commercial Real Estate Services, who represented the tenant (whose name she declined to divulge). "In this market, it's very easy for the landlord to do that. There's not that big a risk involved."
Some landlords are understandably reluctant to flaunt their power at the bargaining table. After all, today's feast could be tomorrow's famine, and they don't want to alienate tenants when the market tide turns. At the same time, landlords say, they can't justify making a deal with a current tenant that is less lucrative than what they could strike with a new tenant.
"The only difference you have is the down time, and if you're in a hot market, you can cut that to six or nine months in order to get a 20 percent or 25 percent increase in rental rates," Inglis said. "It may be worth it."
Seeing who blinks first
Some believe that the new bravado on the part of landlords is little more than a negotiating ploy. They point out that, despite the strong market, it can still take a long time for a landlord to replace a tenant. And some building owners may find themselves at a competitive disadvantage when going up against new facilities recently completed or under construction, which are charging only slightly higher rents.
"I feel it's more a matter of, (landlords) want to test the waters," said Rick Pearson, a broker with Cresa Partners. "A lot of tenants make the mistake of sending the landlord the message that they want to stay, and the landlords take advantage of that, especially now."
Pearson's advice to tenants is to adapt the same tough bargaining stance, making it clear that they are willing to move on if they don't get the deal they want.
But in the end, even tenants that try to drive a hard bargain are likely to find there is little they can do to turn a landlord's market to their advantage. Even if they do find alternatives to meet their needs, the new space would likely come at the same rate that their current landlord is charging and, in moving, they would incur considerable additional costs in time, money and disruption to their business.
"(Moving to a new location) is very expensive," said Angie Weber, a broker with Daum. "It's hard dollars, and the bigger the client, the bigger the cost."
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