Across the country, the industrial market remains in the favor of building owners, while tenants are finding themselves at the mercy of a rapidly rising rental market. The negotiation process has become complicated, in the current landlord-favorable market, leaving tenants with fewer options and less leverage. Low vacancies, rising rents, and opportunistic investors are all part of the story.
We are urging tenants to be as proactive as possible to remedy this shift. The fact of the matter is, tenants like you still have a lot of negotiating power. It simply needs to be deployed at the right time, and in the right way. In order to harness that power, tenants need to have a clear understanding of the market landscape, players, and trends. Once armed with this detailed information, you will have the savvy to position yourself for a successful negotiation.
These are five trends we are seeing that are having a significant impact on tenants.
LANDLORDS ARE CONSOLIDATING
Over the last several years, the largest property owners have grown exponentially by absorbing both regional and national competitors. To put this into perspective, the ten largest industrial landlords own 1.2 billion square feet in the U.S.. As this trend continues, monolithic companies will own more and more buildings.
For tenants this could mean increasingly slower responses and focus shifted to short-term profits over long-term relationships.
TENANT RELATIONSHIPS ARE BEING DEVALUED
The combinations of more demand than supply paired with increasingly more powerful landlords leads to devaluation of tenant relationships.
As landlords gain control over a greater market share they view tenants as easily replaceable and marginalize the value of stable cash flow. Additionally, they will attempt to dictate terms and demand higher rents from tenants, especially in lease renewals.
This will have a profound impact on tenants who are anchored to facilities due to large investments in machinery and equipment.
(NOT SO) HIDDEN PROFIT CENTERS
Most industrial leases are written as net leases. In this structure, the landlord collects rent, yet the other building costs—taxes, operating expenses, and insurance—are the tenant’s financial responsibility.
The landlord typically manages the upkeep of the building and the costs are “passed through” to the tenant. This reasonably allows the landlord to control how his buildings are maintained; however, landlords increasingly use this as a chance to pad the operating expense ledger with management fees, administrative fees, and questionable maintenance expenses.
As landlords become monolithic and less entrepreneurial, tenants will likely have increasingly less control over these costs.
UNKNOWN IMPACT OF EMERGING TECHNOLOGIES
One big question is “how will rapid technological changes impact both tenants and landlords?” New technologies, in the form of robots and AI, are just the beginning of a multitude of changes yet to come.
A production largely run by robots could change requirements for parking, ceiling heights, and proximity to labor.
Landlords could be left with hundreds of millions of square feet of space that is not adaptable to future requirements; for instance, spaces with huge parking lots.
Tenants may have uncertainty about how their space needs will to look in 5, 7, or 10 years, which can impact their decision making.
This remains to be seen, but what we do know is that these changes have the potential to significantly impact lease negotiations.
THE LANDLORD (ALMOST) ALWAYS WINS
Rents are skyrocketing, interest rates remain low, and landlords are consolidating and profiting from managing tenant building costs. These are just some of the reasons that landlords are becoming more and more profitable.
But these are not the reasons that landlords are winning most lease negotiations. By winning we mean that the landlord ends up with more of the tenant’s money than they would have originally settled for. The reason that landlords are winning is because (most) tenants don’t even realize that they’ve lost.
You can be the outlier. You can be the tenant who wins the lease negotiation, while your less-savvy competitors are saddled with higher fixed costs.
The key to your successful lease negotiation is to have great foresight. You can achieve this by being discerning and highly educated about the motivations, goals, strengths, and weaknesses of your landlord.
The more you know about the market and your lease the better poised you are for success in a lease negotiation. The good news is that nothing lasts forever and all markets are cyclical. This market will return to the favor of the tenant, but it may take a while. In the meantime, we urge you to stay informed!
To learn about actions you can take to remedy these unfavorable circumstances, be sure to check out 5 Best Practices to Control Your Rent.