What's Missing
Negotiating office leases is like any other complex financial decision in that more information leads to better decisions. Yet companies face challenges acquiring the right information at the right time. Why? Because the services typically offered by real estate brokerages are centered on transacting based on site selection and the negotiation of basic rental economics. This is not enough. Sometimes, these services (at least) include a level of multi-building negotiation, exercising a degree of leverage, but too often they lack the proper structure to gather and assess critical data, data that will have a big impact on outcome.
The best way to think about this is to contrast the 2 parties in an office lease negotiation, landlord and tenant. Let’s start with the landlord. They’ve acquired or developed the property. They have a known financial structure within which they seek leases that are accretive to the capital partners. Their investment in the asset is based on rigorous analysis of the competitive market landscape. They constantly monitor the leasing values being achieved in comparable spaces at comparable assets. They have architects and contractors to assist them in understanding how much it costs to build new spaces in the building. They know everything about the stuff you can’t see, like the building’s mechanical systems and the extent to which the path of travel is code compliant. They have lawyers that drafted their lease document to protect their interests. They evaluate every proposal based on how well it fits with their financial objectives and the extent to which it compares with the market dynamic for comparable space. In other words, they bring full-scope resources to the table to ensure they’re making the best decision for their investment.
In contrast, tenants typically show up to the negotiation with…a broker. Often, they begin with a “search” process, armed with little more than a basic knowledge of how many people they seek to accommodate and geographic boundaries. What’s missing? An architectural program which details how the ideal space should be designed to accommodate key groups of employees and the important adjacencies between such groups. The program will also reveal which floor plate is best suited to the need, in terms of size and type (e.g., side core vs. center core). Also missing is a project schedule that organizes the project by key milestones to inform project cadence and ensure the project is completed on time, avoiding costly mistakes. Of course, the project budget is another vital element in a well-structured approach. The budget is sensitive to leadership’s financial objectives, which can be nuanced. For example, some companies are focused on EBITDA. Others may be hyper-focused on capital preservation. Maybe the company is a partnership poised to sell in the near-term - - - here, a long-term lease obligation may erode partner value. Most importantly, structuring the team to access all the necessary data means more than hiring a broker. You need to hire a broker that has a team and/or a process designed to assemble a team at the onset.
When tenants get it right, it’s always a byproduct of coming to the table having solved the knowledge gaps that result in poor decisions. The final lease decision is made at the point of total occupancy cost knowledge. From there, the final phases of the project, design, construction, and move, cab be executed without surprise, on time and within budget.