Why Landlords Want to Hang onto Their Tenants

“Knowledge is power.” Those words coined by Francis Bacon in 1597 still ring true today—particularly when it comes to deciding whether to renew your lease or move on.

Let’s assume for this exercise that your current space is functional for your purposes. As a tenant, you stand in a position of strength in today’s market. In recent years, firms have started to cut back on space in favor of a more predominantly remote workforce—a trend that was only exacerbated by the pandemic. Your landlord does not want to lose you as a tenant; finding a new tenant is far more costly.

Think about it: even if your space is in relatively good condition—in need of a few updates—your landlord will still lose money in this scenario. First, there’s the time-lapse between when you move out and a new tenant moves in. Let’s put that at a month—minimum! Throw in permits and inspections, and you’re looking at three months—and that’s assuming there is a lease in place for the new tenant before your existing lease expires.

Let’s say you’re paying $24.00 psf for a 4,000 sq. ft. space. That’s $96,000 per year, or $8,000 per month. If you vacate that space, your landlord stands to lose as much as $24,000 over the three months while the space is retrofitted to the new tenant. For a modest fit-up (e.g., moving a few walls, painting, carpeting, installing LED lighting), your landlord is easily looking at $20.00 psf, at least. That’s another $80,000.

Then there’s the cost to prepare and negotiate a new lease, which comes in at around $4,000. A simple lease extension cost, on the other hand, is nowhere near that amount. The delta between what it could cost an owner to lease space to a new tenant and keeping an existing tenant could be more than $100,000—and we haven’t even touched on free rent for a new tenant.

Now let’s say you stay in the space, but you’d like a few updates. Here’s where your power comes in. You now know that leaving altogether, versus asking for the upgrades, will cost your landlord significantly more.

As a tenant, what’s your play? How do you make sure you’re getting a good deal from your current landlord? First, hire a commercial broker to represent you. (More on this another time.) Next, go into the market and see what comparable offers are being made by competing buildings. Just as you’re going to want enticements to move to another building, so would future tenants look to your existing landlord for additional incentives to move there.

The vacancy rate in office space in Northern NJ is currently 23.2%, according to CoStar, a database that tracks occupancies. But that doesn’t tell the complete story. If you were to look for a 3,000 – 5,000 sq. ft. office space within five miles of Paramus, NJ, you’ve got about 140 buildings to choose from. While one might argue that’s a 75% advantage to the landlord, the real odds are one out of 140. The question becomes, who has the upper hand? In my opinion, landlords really need to consider and appreciate the true value of their current tenants.

If you’d like more information on this subject or have any questions regarding this kind of transaction, please feel free to call me at 201-848-6108 or send me an email to tillsleyr@mcbridecorpre.com.

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