Recession, an opportunity of better location or lower occupancy cost

Friday, June 12, 2009

By John Nguyen CCIM, CPM, FRI

We are in the global storm of recession, Vietnam has been spurred on by the unyielding economic malaise, and therefore business and corporations have to retool their occupancy cost along with their business plans. Some are capitalizing on a scarcity of competition by moving to a better location, while others are weathering the storm by cutting occupancy cost and renegotiating leases. In all cases, this is an opportunity, and keeps pace with an evolving marketplace.
Variable costs like payroll, operating expenses usually draw first blood in a recession. But some ostensibly fixed burdens are ripe for whittling, too, if you know how to negotiate. A big one: space lease, iIn this market, lease agreements inked for the next five or 10 years are open for negotiation. Indeed, landlords have all but come to expect the conversation.

• What kind of deal can you cut? That depends on a few things--your landlord's overall occupancy rate and your flexibility with moving are two big ones--but basically it comes down to how bad things really are. Lease reductions can be anywhere from 10 to 50%, and breaks of 30% are not uncommon.
• What it comes down to for the landlord is this: Would they rather take a 30% reduction in rent or simply take zero?"
• You may have to whip out your books to plead your case, Landlords know that they probably need to consent to some form of a rent reduction if they want to keep tenants in this environment," he says. "There aren't many idle threats being made today. So many businesses find themselves in trouble."
• Another negotiating tip that tenants can walk down the street and throw a dart and find empty space elsewhere. And it's likely that the other landlord will find a way to get them in."

     Due diligence helps, too, so know the market. A landlord with a glut of empty space likely will be more willing to cut a generous deal. "The landlord with a tenant like bank and big name coffee shop can't afford another tenant leaving
     Even relatively healthy renters can press their landlords for breaks. In this economy, stability is a coveted asset. Tenants are having an easier time getting their rents lowered by simply asking. Nobody wants to lose a paying renter right now because it could take months or years to refill that space.
     A good strategy for healthy businesses looking for rent reductions is to pursue a lease extension. Landlords are apt to surrender a 35% decrease in rent for a commitment of two to five years.
     If you have a lease that's expiring in, say, six months, that's as good as a bankruptcy these days. You can then say, 'Look, if we don't get a substantial decrease, we're leaving.' "

     Bottom line: In this economy, treat no cost as fixed. Occupancy costs have become a controllable expense.
Below are a few Strategies to re-negotiate with landlords:

1. Don’t Wait Until It’s Too Late! . If you let the landlord know the state of your business, you should be able to work something out so that your business survives its rough patch and your landlord won’t need to find a new tenant in a difficult market.
2. Know Your Area. As with any negotiation, it’s important that you be armed with as much knowledge as possible. Is there a lot of vacancy in your neighborhood? If so, your landlord might be
especially willing to work with you to keep you on. What are other tenants in your area paying for space similar to yours? If you’re already paying below-market rents, you may not want to “rock the boat,” but if you’re rent is above-market, your landlord should know. And if you’re negotiating a lease renewal, this knowledge will help you determine whether you can afford the time, money, and business disruption associated with moving a business from one location to another.
3. Be Creative total occupancy cost. There’s more to a lease than just the base rent. Perhaps your service charges should be reevaluated for fairness, based on the past time or keeping the rent unchanged but ask the landlord giving you rent rebate.
4. Keep Track of Time. Some landlords, especially in a sinking market, will accept reduced rent in return for the stability of a long-term tenant. If your lease is going to expire at a time when your landlord thinks he could have trouble renting out the space, you might offer to stay on board for a longer term in exchange for a rent reduction today.

Obviously the best lease re-negotiation will be custom-tailored to the needs of your business and to those of your landlord. The key to success is to have a dialogue that is as open as possible. In the long run, you and your landlord should both come out ahead.

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