Where Else Can You Go?

One of the more interesting outcomes from the pandemic has been the advent of a new competitive factor for landlords to contemplate when negotiating with existing tenants; namely, the possibility of no office, either as a permanent or temporary solution. When a company is willing to let the lease expire without having secured an alternative office solution, it takes one of the landlord’s most effective “levers” out of play. As we’ve written about in prior posts, landlords are very good at using time to their advantage. Historically the closer the tenant gets to lease expiration without having fully negotiated new deal terms, the more leverage the landlord has to command better terms.

Prior to the pandemic, negotiations followed a fairly typical timeline. The lease expiration date always served as a hard line by which something had to be done. This is no longer the case, especially as we work through the first phase of post pandemic occupancy. Even for occupiers who have every intention of returning to the office, the fact most employees have been working remotely for a couple of years now makes it possible to extend remote work for some period of time while working on the right office solution. A lot of landlords will underestimate this variable. We’ve already seen instances when the tenant has established a price point at which it would consider a short term lease extension and the landlord has countered with terms that imply they perceive more leverage than they actually have. When the tenant simply walks away from the negotiations, the landlord is often surprised.

Instead of negotiating to avoid the possibility their tenant may relocate to another building, today landlords must realize they are solving for a broader spectrum of places the tenant may go, including home. The next couple of years should bring a steady uptick in leasing activity as companies recommit to the office. But that commitment will look different than it did in the past. The pathways taken to formulate the new office may also be different, possibly undertaken with less pressure attributed to the expiring lease.