Article by Chase MacLeod, Senior Vice President & Partner, Irvine & Inland Empire
It seems like only yesterday that a successful lease negotiation for a tenant was judged by how many months of free rent were secured and how large a tenant improvement allowance could be extracted from a landlord whose building was one of a dozen sitting vacant for a year or more. The tables have turned, and quickly. Now, just getting to the best and final round and securing the deal is cause for celebration. Deals going for over the asking price, without any free rent and a landlord that says “take it as-is, or not at all” has become par for the course. Today, it has become less about “how good of a deal can you get me” and more about “can you get me the deal?”
Our team has negotiated hundreds of industrial transactions in 35 states around the country. And, the Inland Empire is by far the most aggressive market for a tenant or buyer to compete in.
The last sixteen years have shown us the ups and downs of what it means to negotiate deals in either a “tenant/ buyer” market or a “landlord / seller” market. At the height of the recession and up until 24 months ago, tenants and buyers had the luxury of assessing their space needs 12 months in advance, weighing their options, touring multiple times and soliciting proposals from a long list of available buildings that had been listed six months or longer. Now, the tables have completely turned. It is officially a landlord / seller market.
This is especially true in the size range between 20,000–250,000 square feet. Typically, multiple offers are generated within days of a space being placed on the market, or even prior to a property coming to market. A bidding war ensues, the result of which is a deal over asking price, with little to no free rent. Some tenants are even willing to take spaces with absolutely no tenant improvement allowance, in an effort to be the “chosen deal.”
The situation is only intensifying, as Inland Empire tenants are now competing against users from the San Gabriel Valley, Orange County, Los Angeles and Corona who are accustomed to paying higher rent for lower quality buildings.
Our clients are constantly asking us: “I see countless signs on buildings everywhere I go. How could there be a shortage of quality space?”
Don’t be fooled. Vacancy in the Inland Empire West is below two percent (2.0%), and shrinking daily. Vacancy rates are at, or below one percent in markets like Orange County and San Gabriel Valley, and the Inland Empire is now the only alternative to tenants seeking quality expansion alternatives (200,000 square feet plus).
A couple tips for tenant success in this competitive market:
When pursuing a new location, give yourself ample time as alternatives have become increasingly difficult to find. Many tenants and buyers you will be competing against are prepared to forgo free rent or early occupancy to secure the deal with little to no tenant
improvements from the landlord. It is important to understand the environment you are in.
Allow your offer to be presented in its best light. Yes, you need to provide at least two years of financials and tax returns with your
first offer. Landlords tend to dismiss deals they cannot underwrite immediately.
Be prepared to react quickly. Most tenants are submitting offers at or over asking price within days of the property hitting the market,
in the hope that the LOI will quickly be accepted by the landlord, allowing them to go to leases immediately.
Prepare yourself for a minimum five-year lease term. Landlords are driving this based on how competitive the market is.
While it would be reasonable to assume that your current landlord would go out of their way to keep you at the end of your lease term, the reality is they most likely won’t. The likelihood is that your current monthly rent is well below the current market rate. Landlords are approaching existing tenants nine months in advance of their lease expiration. Given how much rent has increased in the last twelve months, if a tenant seems unwilling to adjust their rent to “market” (which could be 25–40% higher than a deal signed five years ago), the landlord may think it’s in their best interest to test the market for a new tenant. While you would think the landlord would rather forgo the risk of vacancy in return for a secured tenant, they are most likely willing to take that risk today.
Triple net (NNN) leases are the new standard. Don’t expect landlords to concede to an industrial gross or modified gross lease. In most cases the expense of taxes, insurance and maintenance are passed through to the tenant.
The more information and transparency you can provide your broker the better. Budget considerations, seasonal hurdles, and M & A activity should be discussed up front so interests are aligned and your broker can properly perform and represent your interests.
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