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Do Not Search For Space. Search for Hungry Landlords.

Do Not Search For Space. Search for Hungry Landlords.

February 07, 2017
Search for Hungry Landlords

Normal course of action when finding space is to call some signs on buildings, search the internet and or hire a commercial real estate agent.  But the search for commercial space really should be the search for hungry commercial landlords.

The focus is always the same.  Define how much space you require, search for spaces in that size range and evaluate what you find.  Getting the best deal though is rarely about completing a search and then selecting one of the options you discover.  

Take this financial analysis provided by one of our Lease Ref staff members:

landlord-proposals.png

This was for a client who required 2,200 square feet of office space...a slightly below average sized tenant for this market.  The term was for 5 years and the tenant's creditworthiness was nothing special - they were a run of the mill digital marketing company.  

They had been in business for 6 years and business was steady.  There were 6 months left on their existing lease and they did not require the 3,200 square feet on their existing space.     

Why was there such a difference in landlord proposals?  Why would some landlords be much more aggressive on pricing when the market was healthy (7.4% availability rate at the time...a landlord's market).

Here?s Why: 

Landlord 1

Life was good for landlord 1.  The available unit was the only one left in their B class building.  That tenant had provided notice that they will be vacating, but still had 6 months left on their existing lease.  The landlord owned three other buildings, all fully leased with a broad tenant mix.  

Additionally, in the building in question, the anchor tenant renewed their lease 8 months prior for a 10 year term.  It should also be noted that the landlord inherited the buildings, he was usually slow to respond to tour requests, often had outdated information on his website and never hired listing agents.  

stacking-plan-anchor-tenant-renewed.png

Landlord 2

Landlord 2 provided a better than expected proposal for no apparent reason.  

This suite was the only space available in the building and the landlord had four other buildings, all 100% leased.  

When speaking with some other brokers local brokers, the main tenant (60% of the building) had hired a tenant rep firm to tour options.  As they were looking to take 20% more space it looked like shopping around was not just a tactic to increase renewal leverage. 

The space was not being marketed, but it looked like the landlord would have a large upcoming vacancy. 

upcoming-vacancy-for-the-landlord.png

Landlord 3

Our unit was the only suite available in Landlord 3's building, but for some reason, they were offering a bonus real estate commission.  They had also hired a listing brokerage to market the property, when traditionally they have handled leasing in-house.  

Upon further investigation the landlord's other buildings were in trouble.  He hired the same listing agent to market both of those properties, which were hit by untimely vacancies.  

In fact it was the same tenant who outgrew one building and leased significant space in the second building.  That company was acquired and were consolidating spaces. 

The landlord enjoyed rent from a credible company for a long time, but ended up with too many eggs in one basket and was now exposed with high vacancy overall.   

bonus-real-estate-commission.png

Landlord 4

The vacancy rate for landlord 4 was much higher than the market at 15%.  

Additionally, there were three options in the size range we toured, so they were competing with themselves. 

units-available-in-the-same-size-range-compete-with-each-other.png

All of those units were both available and vacant.  The landlord inherited the small portfolio of buildings but had a much different disposition than landlord 1.  He was the type of landlord that replies to space inquiries within minutes, even on Saturday nights.  

Takeaways

Explore what is going on beyond just how many square feet each space is and the gross rental rate.  Find out about the context and the story with each landlord to maximize your leverage and minimize your cost.   

The client in this case went with the landlord 4.  Their situation combined with the landlord's attitude led to the best lease proposal, by a substantial margin.  In addition to the best rent, the client also achieved flexible sublease rights, expansion rights, and a generous TI allowance to build out the space.    

Remember - do not search for space - search for hungry landlords!

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