There’s a bit of alchemy involved when concocting a recipe for the Perfect Renewal. Factors such as the tenant’s size and credit worthiness, how much term is remaining on the lease, and the landlord’s position within the context of the overall market all play a key role in determining the best renewal strategy.
One of the first things to consider is the general direction the real estate leasing market is heading, from both a macro and micro level. Base rental rates typically escalate annually between 2.5-5% when you’re locked into a lease, therefore if market rents are outpacing that rate and will be for the foreseeable future, then a longer lease such as 5-7 years is advisable, from the tenant’s perspective. If however rents are falling, then negotiating the shortest term possible (without forfeiting rights that would cause you to lose the space altogether) will allow you to renegotiate better and better terms until the cycle again finds the bottom. This strategy runs counter to the landlord’s goals, however, as rental rate reductions cut into their bottom line. The tenant’s broker must then identify other ways their client’s tenancy can benefit the landlord, and be able to effectively articulate and negotiate using them.
Many factors will play a role as to how far in advance of the lease expiration the tenant’s real estate advisor should begin dialogue with their client’s landlord, but the single most important factor is that there is enough time to locate, negotiate, and relocate to another competing property, even if the tenant’s goal is to simply stay and renew. Commercial leasing is a business, and the tenant is the landlord’s customer who will pay a substantial amount of rent, over time. It is only fair, then, that the tenant’s potential new transaction be brought to the open market where other landlords can compete for their business.
Fear of Loss is a powerful thing, and by touring the market and viewing alternative properties and perhaps even accepting unsolicited proposals from other buildings, the tenant’s landlord knows they must put their best offer forward or lose an income stream to another property.
There are of course many, many other factors that a tenant should consider when timing their renewal; tenant movement within the building, the landlord’s current fiscal position, and even competing landlords’ aggressiveness to “make deals” (a landlord in the Jack London Square submarket of Oakland, California recently lured a 40k square foot tenant to relocate a year in advance of their expiration by offering them a full year of free rent). Early renewals well in advance of the contract expiration are also typically achievable using a “Blend and Extend” strategy.
What’s most important is that the tenant hires the right commercial real estate advisor who knows the market cold, and does not underestimate the time required to implement a full real estate process so as to yield the absolute best terms possible.