Industrial Market Trends are Changing Tenants’ Approach to Lease Renewals
With $17.3 billion in commercial mortgages coming due in 2012, landlords are more motivated than ever to incentivize tenants to renew their existing leases. Landlords are trying to stabilize their buildings and refinance. To do so, they must show a strong rent roll to the bank.
Some incentives such as free rent, reduced rent (blend and extend), upgraded lighting and dock doors have become common concessions offered by landlords to tenants who renew. It’s easier and safer for landlords to provide these concessions and keep their current tenants than try to re-fill the space.
Typically, as a tenant’s term was nearing the end, they would approach the landlord and exercise their option or negotiate a deal based on current market rates. However, tenants that are nearing the end of their 5 year (or more) lease probably should not exercise their option. An option that was negotiated 5 years ago is not reflective of today’s market and the deal could be renegotiated in favor of the tenant.
Another very common trend we are encountering in the leasing market is tenants’ lack of long term commitment. Frequently, tenants are shortening their commitment to a landlord from 5-7 years to 3 years or even 1 year. This hesitation is mostly due to the uncertainty of the market. One strategy being implemented by landlords to counteract this trend is “blend and extend”, where a lease is extended and the rate is lowered. By extending the lease, the landlord secures lease term stability and the tenant gets an upfront savings in rent. It is a great win-win for both parties.
It’s true we are seeing a steady decrease in vacancy, currently down from 10.59% to 9.59% in the 4th quarter of 2011, a reflection of the steady rate decrease in the industrial sector. Landlords are aggressively renewing tenants 12-18 months prior to the expiration of the current lease and are rolling out the red carpet to do so. Now is a great time for tenants to capitalize on the incentives available from their current landlord.
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