Savvy reset of contract is worth a try in soft market
Advice: Have numbers ready, but don’t be combative
The Delaware rental market hasn’t kept pace with the escalation clauses that are in some office leases, so it’s possible to reset your lease numbers if you think ahead, experts say.
Your lease is one of the largest contracts an independent businessperson signs. What’s the sweet spot for a small businessperson to initiate negotiations?
A year in New Castle County, or maybe a little longer if your business has special needs, such as a certain power supply.
“If you’re getting out there a year in advance, you’re solid,” said Rick Kingery, vice president of Collier International.
In Kent County, you might not need a year because the commercial rental market is soft, but you’re smart to start as early as you can, said Phillip J. McGinnis of McGinnis Commercial Real Estate in Dover. He said businesspeople whose landlords are willing to negotiate generally are staying put to save moving costs and all the costs involved with changing the information on stationery and bank accounts. “I talked with a small user. He said, “˜My landlord is talking about raising the rent, so I’m going to go somewhere else.’ I had a lease written, then, his landlord called and said he’d reduce the rent. We’ve got a lot of vacant space. You can make good deals in Dover.”
Although Kingery said rents are flat in Wilmington and McGinnis said they are about where they were five years ago in Kent, it could break badly for you if you wait until just a few months before your lease is up because, then, you’re a captive tenant.
“You have to negotiate from a position of leverage,” Kingery said. “Landlords are smart. They do this every day. They know what they’re doing. If you get inside a time period where you can’t sign a lease somewhere else and you can’t do construction somewhere else, you become a captive tenant. You’re staying in their building at their will. That’s not to say we don’t have some really great landlords in this area who view themselves as service providers.”
“For general office space, if you want to look a year out to see if there might be a better deal or you suspect you might need a lot of tenant improvements, then a year is probably not a bad idea,” McGinnis said. “But Kent is much smaller scale. I just leased space to a Wilmington lawyer. He’s got an office in Wilmington and he wanted an office in Kent. He leased space literally in 72 hours.”
Michael Turick, vice president of leasing at Buccini/Pollin, a major player in the hotel industry nationally and Delaware’s largest private office landlord with more than 3.2 million square feet, said Buccini/Pollin’s approach is to treat its office tenants as hotel guests. They want them to have a good stay and come back. “For me, it’s always about really trying to come to the table with a solution that will work both for us and for the user, so nobody’s leaving the table bloodied and limping away, so to speak. We always view our tenants as partners.”
“If you’re fair in your approach and you’ve got the research behind you want to talk to the landlord, you’re going to be able to strike a fair deal,” Kingery said. “It’s when you’re too aggressive that you’re going to find yourself in a combative situation where someone wants to win by making you lose.”
Kingery said any break point in your lease is an opportunity to look closely at your business and determine where your office can help you redefine your corporate culture or the way you perform task. Are there enough meeting rooms? Are there too many desks? “You can cure all the paint points,” he said. “Landlords, when you go to them with a mission, are completely open to working with you. You just have to have done the research about what you want and be able to articulate that, and they’ll help you with it.”
Landlords will not think you’re too high-maintenance if you go to them early on and tell them you want a do-over to bring your office in line with the changes in the work world like smaller computers, fewer offices and more collaborative spaces.
“They study that as closely, if not closer, than tenants do,” Kingery said. “When you come to them and tell them you want to reconfigure you workspace to the models of today, they understand. They see it coming. Like I said, they’re smart people.”
Of course, if you need a fit-out with a floating glass staircase or another over-the-top feature, the landlord may ask you to share the costs.
Turick said the Wilmington market is not really flat because so few new buildings have been erected, other than the Star Building at the Wilmington Riverfront. He said most new construction has been specialized, such as Incyte’s new addition or Christiana Care’s builds.
Turick said several Wilmington businesses have segued to smaller offices as equipment shrinks and people are working outside the office more often. “There’s definitely been a very big market shift to less grand office spaces. There are still the law firms in town that want to have partners get a certain size office and associates get a certain size, but I think firms are becoming smarter about their space and having the space be more useful for them,” he said.
Financial services companies, where many employees require nothing but a keyboard and headset, are leading the way. Turick said major banks have fewer hard offices but more conference rooms, team rooms, employee lounges and small rooms to provide privacy for phone calls.
The co-working trend that started at WeWork in New York City in 2010 is growing here. The Mill, the shared-office space in the Buccini-owned Nemours Building, will grow to an entire floor by the end of 2017, Turick said. The growth will come in two phases beginning with more than 6,000 square feet early next year.
Turick said Buccini/Pollin hasn’t seen a big new tenant push but they are seeing organic growth of existing law firms, banks, financial services companies and smaller city anchors such as M&T Bank and WSFS.
He noted higher activity since Election Day. “There’s just more activity in the market. A lot of tenants and prospects who had been sitting on the sidelines for a while are in the market. It really seemed like that election week and the following week were two of the busiest weeks we’ve had in all of 2016, which we were not anticipating,” he said. He said more people made initial calls and some moved to the negotiations phase, and he’s hopeful it will lead to finalizing leases for more space.