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Tips for Tenants and Landlords Negotiating Leases
in a Challenging Commercial Real Estate Market |
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There’s no debating the commercial real estate market has transformed significantly in the past 24 months for both tenants and landlords. While the economy shows some definite signs of recovery, both groups are straining to show a profit, break even or just stay in business.
Savvy tenants are trying to capitalize if they can, locking in long-term leases at low prices, while landlords are doing their best to plug empty spaces left by bankrupt chains or stores that went out of business.
Landlords must strike a balance between signing leases to fill space and agreeing on realistic terms. Ending up with a deal that is too favorable fills space now, but may look downright silly a few years down the road when the market is stronger.
While each landlord/tenant relationship has its own unique dynamics, there are a few key points for each side of the bargaining table to take into account during the negotiation process.
Tenants have four main factors to consider when evaluating their current business situation and location.
Location Performance
Tenants must examine the sales figures of their current location and see how they measure up to what they had budgeted and the performance of other stores in their chain.
Study the Profile of Co-Tenants
Considering the quality of co-tenants and their ability to remain profitable is important to the success of any retail business. Tenants must decide if they fit in with the current mix of retailers and evaluate the probability of those retailers remaining in business and staying in that location long-term.
What is the Center’s Market Position?
It is important for tenants to consider the market in which their store is located. They need to decide if the location is still a good fit for their business or if there are opportunities to relocate to a better location.
When looking at their current location, tenants should consider the quality of the center where they operate. The physical and structural appearance should be up-to-date, and/or recently renovated, and the center should be well maintained.
Tenants also need to comparison shop and investigate what other locations may be available in the same market area and at what price.
Long-Term Leases at Low Rates
Tenants should capitalize on current economic conditions and plan for future success. By executing long-term leases at low rental rates, tenants will be well positioned when the economy and sales inevitably improve.
On the other side of the negotiating table, Landlords have many vital factors to consider to keep their centers occupied and to maintain profits.
Examine Tenant’s Leasing Terms
The price and length of lease contracts has changed dramatically in the past two years, impacting both landlords and their profits. For landlords, short-term leases are preferable in a recessed market, so when the economy improves, they will be in a position to increase rates and maximize profits.
In response to current market conditions, sacrifices may need to be made to keep tenants where they are, which could mean longer terms at lower rates. Landlords should not be afraid to lower their current rental expectations…the competition is certainly doing it.
What is the Financial Position of the Center?
Landlords have to consider the financial position of both their tenants and their property. When looking at each tenant, they need to evaluate current sales performance along with the tenant’s ability to maintain those sales in this economy. If they do not meet acceptable standards, landlords must consider other businesses that will.
Landlords also need to examine their own financial standing. Will the income from the center cover all expenses or will the landlord have to pay out of his own pocket to stay afloat? Refinancing may be an option for consideration to ease the financial burden on the center.
Stay True to the Profile of the Center
The tenant mix is the key to the success or failure of any shopping center. If the tenant mix doesn’t work, then both landlord and tenants are in jeopardy. Landlords need to determine the profile of their center and must adhere to that profile. Are they a convenience center, fashion center, high-end center, service-oriented center, etc.? Landlords have to consider each of their current tenants and decide if they fit into that profile, and how each retailer complements or acts in synergy with the others.
Availability of New or Replacement Tenants
After determining the profile of the center, landlords can seek out possible tenants - either from new retailers moving into the area or from competing centers.
When considering new tenants, landlords must always first look at the current tenant mix to determine which types of new stores would help strengthen it.
Landlords Must Look Over Their Shoulder
Landlords have to determine what competitive advantages or incentives their center has to offer when compared to similar centers in the market. They must strive to equal or exceed the retail offerings of their competitors without breaking the budget they set for the year.
The preceding considerations will help both tenants and landlords succeed when negotiating leases in these unprecedented economic times.
One of the greatest available resources for more detailed information relative to retailers is brokers and retail consultants. These experts have the experience and relationships, which individual landlords and tenants may not have, to get them where they need to be. The more varied and broad-based the consultant or broker, the greater the probability for dollar saving results.
Rene Daniel is a Principal with Trout Daniel & Associates, a full service commercial real estate firm, and President of The Daniel Group, a national retail consulting firm.
About Trout Daniel & Associates
Trout Daniel & Associates is a full-service commercial real estate company serving businesses throughout the Mid-Atlantic and beyond. The firm takes a highly-customizable approach to providing a full range of commercial real estate services, including brokerage, development, consulting and management services to the retail, office, industrial, multi-family and investment market segments. For more information visit www.troutdaniel.com or call 410-435-4004.
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