Ever have one of those days where you wish you just hadn’t picked up the phone?
My client was hard at work when the phone rang. It was the landlord who had rented him the 7,000-square-foot industrial space in Mississauga from which he operated his business.
What the landlord had to say nearly made him fall out of his chair.
With six or seven months left on his lease, he was staring down the barrel of renewal. The landlord had called to tell him that upon renewal his rent would go from $8/sqft + TMI to $13/sqft + TMI.Let’s do the math … that’s a change from $56,000 a year to $91,000 a year. A 35.5% increase overnight.
Fight or Flight — When Can’t Afford your Rent Increase
“How am I supposed to absorb this, Dean?” he asked me. “I’m already having distribution issues and employee issues because of COVID … but a rent increase too? I need to start looking for cheaper space.”
I don’t blame him for his distress. I don’t blame him for taking personally a sixty-plus percent rent increase. I don’t blame him for picking up his phone and Google-searching the phone number of the nearest UHaul.
But as his commercial real estate representative, my job was to de-escalate the shock and look at the situation rationally.
- Moving costs money. He would have to relocate his equipment and his office to a new space, and possibly renovate and upgrade the space to suit his business needs. Even a lower rental rate might not justify that kind of hit.
- He might not even find lower rent on an appropriate space. The industrial leasing market is extremely tight right now. Landlords have the upper hand, and they know it. They want top dollar per square foot, plus TMI, and they know they can get it.
- The landlord’s first offer isn’t necessarily the final offer. Everything is negotiable. Just because the landlord has the upper hand doesn’t mean a tenant has no cards to play. Landlords fear a long, costly vacancy if they lose a tenant. Industrial landlords are also notoriously picky about the uses their tenants put their property to, which compounds their tenant turnover problems. Bottom line — if you have been a good tenant, you do have some negotiating power.
What to Do Next When your Landlord Hikes your Rent?
Based on these variables, our strategy going forward is twofold:
- Look for new space. It can’t hurt. Maybe we will happen on something spectacular — the perfect combination of rent and functionality to justify the moving expense.
- Play hardball. I will reach out to the landlord, stir up his fears of loss due to vacancy, and see if I can negotiate a discount on the proposed rental rate.
If your commercial lease expires soon, you might be surprised to learn that landlords typically expect to receive premium rental rates from a renewing tenant vs. a new tenant. They actually estimate your moving expenses and will try to factor those costs into their renewal proposal.
The hope, of course, is to get the maximum rent they can out of their current tenants, without making it more economically attractive for you to move.
The biggest mistake we see commercial tenants make is that they don’t allow themselves enough time to negotiate effectively.
Your “Option to Renew” clause typically requires you to give notice of your renewal intentions to the landlord, anywhere from six to twelve months. If you wait until you’re within that period to give notice, you lose a lot of your negotiating leverage because you have fewer choices under your contract.
We can help you make the most of this situation, creating a competitive arena of the most cost-effective alternatives in the market.
With commercial real estate, you always have options. When confronted with a tough situation, keep cool, take your time, and — most importantly — take the time to talk it out with a commercial real estate professional.
Facing a similar situation with your commercial lease? You’re not alone. My phone line is always open if you have questions or need to talk out a scenario with a CRE pro who is on your side.