Small office tenants are striking impressive deals with landlords
In the pandemic era, small businesses are finding more negotiating power than ever before.
When Alina Clark was ready to approach her office landlord with a conversation about renegotiating the rent, she knew that mentioning the economic havoc wrought by the pandemic wouldn’t work. So the co-founder of CocoDoc, a software development company based in the Los Angeles area, tackled the problem in a different way.
“It’s easier to get cuts on things like maintenance costs and utilities, instead of the base rent,” she says. “We easily got a rent reduction by focusing on those instead of the base rent.” It also helped that she assured the landlord the company was going to stay for the long term. “The fact that we were willing to commit for five years was one of the major considerations when renegotiating the lease agreement,” Clark says.
CocoDoc is one of the millions of small businesses that make up the backbone of the commercial office sector. They are not the Salesforces or JP Morgans of the corporate world by any means, but their leases serve as an integral base for a building’s occupancy. But until recently, by virtue of their small size, they had little sway with landlords when it came to renegotiating or negotiating a lease.
Then the pandemic happened, and their fortunes changed.
Rise of the small office tenet
“Today, smaller tenants are in a position to negotiate better lease rates at a shorter term,” says Greg Azayev, executive managing director and principal broker at Stelth Commercial Group in New York City. “The most significant expense for any office landlord is vacant space. The rising inventory of vacant and sublease space puts pressure on landlords and makes them more open to concessions and terms that favor the tenants.”
There are other reasons a landlord would be willing to sit down with a smaller tenant, says Trevor Adler, a partner in Stroock’s national real estate group. “The tenant might be a long-term and solid one, or there could be a reputational aspect — meaning the landlord wants this particular company in its building.” A high-value tenant, even a small one, shows other potential tenants that a building is worth considering, Adler says.
The tenant could also be in growth mode, which would have appeal to the landlord, says Azayev. “A smaller tenant with a strong business plan and ambition can sway a landlord in today’s market to lease them a small space at a discounted rate. You see this frequently where a tenant starts with 2-3,000 square foot space, and in five years, they take up an entire 20k square foot plate in a building.”
Another reason could be the landlord has a high amount of debt on the property and needs to have a high occupancy rate to stay in compliance with the financial covenant in its loan, says John S. Moody, Jr., a board-certified commercial real estate attorney and founder of the Houston real estate law firm Moody Law Group.
Moody doesn’t advise tenants to go it alone when shopping around for space. “The way to get the best deal is to have an experienced office broker who knows the market,” he says. “A good office broker will help you negotiate for things like tenant improvement allowance, free rent, parking rights, overtime air charges, caps on operating expense increases, operating expense exclusions, expansion options, termination options, renewal options, and rights of first refusal on adjacent space. Other terms like expansion options can be critical to remaining in the same building as your company grows. In other words, there are so many other important terms to negotiate that are just as important as the rental rate.”
It is also important to understand your current and projected office space needs over the next five to 10 years before you sign a lease, he adds. “A good broker can help you evaluate your needs and how best to structure your deal.”
Most experts will advise on using a broker, but there are some scenarios, such as renegotiating rent with an existing broker, where it can make sense to do it yourself.
Just make sure you approach the landlord correctly and are armed with financial information.
“When renegotiating with your landlord, be honest with respect to your financial challenges but also be optimistic about your ability to recover,” says Aaron Weiner, president of Weiner Property Services in Beverly Hills, Calif. “Negotiating with your landlord is no different than going into your bank for a loan. If you go into the bank with your pockets inside out and desperate, are they going to extend you credit? Not likely. I coach my clients to tell their story in a way that will make the landlord invest in them. And it is true — when a landlord gives you a rent abatement, he is investing in your business.”
With the right attitude, tenants can strike all kinds of deals, says Nathan Murphy, co-founder of QuizBreaker, a small business that offers virtual team-building activities for employees. “We were able to re-negotiate rent by believing we were in a growing industry that was going to skyrocket after seeing a recovery post-pandemic. By promising our landlord we would re-pay any debts we accumulated over the course of the pandemic, we were able to significantly reduce the amount we would have to pay as long as we recouped later on.”
Taking risks
Sometimes, though, a landlord needs more than a nudge to realize a tenant is serious about renegotiating space.
Christopher Adams, the founder of ModestFish, was one of the countless business people who struggled during the pandemic-led recession. “It got to the point where our office monthly rent was becoming too rich for our blood, and we had to take steps to cut costs any way we could, starting with the rental price.”
Locked in a two-year lease, Adams first tried sending emails, asking the landlord if he could lower the rent during the pandemic, and even proposed that he could make up the difference of a discounted rent in later months once the pandemic rescinded. “He would not accept any of this,” Adams said.
“What worked for us was this: We realized that the growth in office space vacancy has grown substantially since the pandemic began taking its toll, and we were prepared to change locations as a last resort, though that was never our primary intention. I made a call to our landlord and let them know that we were going to put in a 30-day notice that we will be terminating our lease, with 14 months still remaining, and that they could keep the deposit with no issues, and gave best apologies in addition.”
Breaking a lease was a legal risk but Adams was hoping the growing vacancies in the building would play in his favor.
Something worked. The following day he received a call back from the landlord asking him if there was anything that they could do to accommodate us into staying in his building. “I let him know, plain and simple, that the rent was more than we can budget for currently, and we were planning on going into a building nearby that [was renting for less]. Right then, he asked if he lowered the rent for the duration of the lease if we could stay.”
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