Rightsizing Your Real Estate

The Circle came together with Tim Kazul, Jon Wittemyer, Lukas Ault @ CBRE, and Katherine Murphy, Brenna Moorhead @ Goodwin to discuss how to work with your landlord on financial needs here-and-now and space need in the near future.

Here were the key takeaways:

Know your landlord, know your lease, then engage them with a clear plan. First, prepare to approach your landlord with a specific request. A general plea for relief will get little traction. CBRE has seen rent deferral as the most frequent concession landlords have been willing to grant, not abatement. Second, know the dynamics at play on your landlord’s side. Is your landlord a public REIT, a large institution, or a smaller mom and pop owner? Do they have a lender to answer to with their own cash flow needs? Are they merely the “middleman” in this negotiation? How much does your lease account for in your landlord’s building/portfolio? Coworking operators are in need of cash where you may be able to pay now to get out of a longer-term lease. Lastly, Goodwin advises companies to understand all of the terms in your lease. Though your lease was drafted without a pandemic in mind, your negotiating latitude is often found within the language of terms like “Interruption of Service”, “Force Majeure”, “Penalties for Default” and others. Also understand the terms of your insurance policy which might possibly provide for some financial relief on rent.

Playing hardball does not equate to being combative. You should negotiate and you should push for what your business needs. But, you can have a friendly dialogue while proposing demanding terms. At the very least, understand that your landlord is overwhelmed too. Landlords treat tenants with the same respect that is being afforded to them. Be transparent. Your landlord’s diligence will likely be more scrutinizing than when you first took possession of the space (note: consider an NDA when bringing sensitive information to the table). Show them the real impact – on your books, on your workforce, on your ability to pay. The more dire your situation, the more likely your landlord is to work with you. But, if your business has plenty of cash runway and is not struggling, don’t expect concessions just because others have gotten them. To summarize, use the CBRE axiom: “negotiate, don’t berate.”

If you are looking to sublease your space, move quickly. Historically, first movers tend to benefit when the market is poised to have a surplus of sublease square footage coming online. The volume of sublease space in the Bay Area has increased by 100% in 2020. If this is your strategy, get ahead of others to avoid competing in a buyers’ market. Also, consider bringing a prospective new tenant directly to your landlord – this could give you leverage to negotiate a termination, then hand off the new tenant to your landlord and avoid having to become one yourself.

Real estate historically lags ~ 6-months. Based on historical data, in recessionary periods the commercial real estate market has lagged the stock market downturn and recovery by about 6 months. In the Bay Area, tenant demand is down 50% from 10 weeks ago. Expect that the market to soften in the coming months where you might pick-up some space for cheaper.

HERE you will find proposed levers to pull to mitigate CRE costs by Goodwin and CBRE.