Where Does It Hurt?
Office lease negotiations typically cause pain for one party because leverage is rarely balanced such that the outcome is a true win/win. Sure, the actual winner will suggest the other party also won (after all, they got the deal), but sometimes winning feels a lot like losing. That’s OK. Markets ebb and flow. What matters is that you know how you’re hurting the other party.
Successful negotiations evolve from awareness. It’s rarely about dictating terms. Ego, pride, ignorance, and poor communication limit the pathway to success. The “table pounder” can only be effective when the counterparty has no option but to deal with him. Even still, a one-way negotiation misses opportunities to create a better outcome. It’s through learning what matters to the other (and why) that we can advance the negotiation more effectively. It’s also important to take a fact-based approach to the market. Conjecture and hyperbole have no place in a well-structured negotiation.
Over the years, I’ve come to identify a handful of negotiation styles. Perhaps the worst of these is the decision-making executive who has not participated in any of the negotiations but who maintains final approval rights, and always takes the approach that whatever has been negotiated, there’s at least 15% more value to be extracted. When negotiating on behalf of a well-known financial firm I encountered this very character. We had been negotiating for months and arrived at a term sheet that was deemed acceptable by all parties, but which needed to be approved by the CEO. Sure enough, he wasted no time tearing apart the terms, all while providing some colorful (and unsolicited) commentary on our negotiating skills. I listened, waiting for an opportunity to tactfully counter his tirade (he was also a speaker phone screamer). Thankfully, my moment came in the form of an unexpected gift when he revealed that he had recently had lunch with a CEO friend whose firm had completed a lease in the same project in which our (fast collapsing) deal had been negotiated, but on terms that were substantially more favorable. This was his basis for ripping up our term sheet. Well, it just so happened, the deal he referenced was one I negotiated. Let’s just say the terms he described were wildly inaccurate. In this moment, my credibility having been significantly upgraded, I was able to regain control of the narrative and talk the CEO off the cliff. A rare stroke of luck, for sure. But absent such luck, there would have been very little to do but attempt to re-trade the terms, very likely killing the deal.
Each party has limits to what it will do, to what it can do. Years ago, this time I was on the landlord side of the table, I was representing a building in which the anchor tenant’s lease was expiring. Market conditions favored the occupier, and we went into the negotiations knowing we had a lot at stake. The tenant was being advised by one of the top brokers at a top-tier firm. A meeting was set in which the tenant’s advisors came to present their proposal. It was painful, very painful. In fact, it was so bad, my colleague (my boss) quickly began scratching numbers on a sheet of paper (the tenant’s advisors had spreadsheets, we used a Bic pen and a calculator). After about 3 minutes of silence, my boss looked up from his chicken scratch and said, “…based on your proposal, we’d be better off boarding up the building for the next 5 years”. He was right. The tenant’s advisors had taken their leverage too far. The proposal did not reflect the facts of the market, nor was it remotely tethered to a reality in which any landlord could reasonably act. It was a true non-starter.
Today, most occupiers in San Francisco enjoy historically strong leverage. It’s a welcome shift from having endured the opposite dynamic for the better part 2 decades preceding the pandemic. This is your moment to create long-term value. But know how you’re hurting the landlord. There’s pain that hurts and there’s death. You want to keep your landlord alive. Your rightful exercise of the full market leverage to which you are entitled will hurt. But be sure to leave them capable of performing, of providing a great product for your occupancy experience.