Real estate costs often are the second-highest expense for a business, behind personnel. And while office and retail markets continue to move toward stabilization, in 2024 it remains a tenants’ market. In this environment, combined with access to internet listings of available properties, you may question the value of engaging a broker to help with your relocation.
Tenant-representing real estate brokers do more than find available spaces and submit a request for proposal (RFP) on your behalf.
At Calamos Real Estate, we offer a unique perspective: Our boutique firm is the developer and property manager of CityGate Centre, a 31-acre mixed-use community in Naperville that stands out in the market for being roughly 90 percent leased across office, retail and multi-family residential properties.
This experience gives us insight to what matters most to you as a tenant, and direct knowledge of landlord and property manager needs and expectations. In short, as tenant-representing commercial real estate brokers we understand which tenant asks are feasible for an owner. That’s a value-add as we guide you along the path to a successful lease transaction.
Keeping in mind that most landlords won’t accommodate every ask—even in a tenants’ market—your broker needs to know your priorities to best advise and advocate for you. For example, we all know location is a mantra in real estate. But is it a geographic location or a building type that defines location for your business? Are you moving to accommodate growth, with future growth in mind, downsizing and upgrading due to hybrid work policies, or are you starting out and looking to keep costs as low as possible until your projected revenue stream is activated?
Your broker can inform you about various considerations based on your business plan and operational needs and, with you, prioritize the asks when negotiating a lease.
This is first in a series of three articles about some common concessions—and the considerations that go with them—when deciding what you want your tenant representative broker to help you achieve.
Rent abatement & escalation: Your broker can tell you what it is and how it works
The lowest rent isn’t always the best deal. Depending on your circumstances and priorities, instead of asking for a lower rent, perhaps a rent abatement—"free rent” for a designated term—is your best course of action. Or, perhaps not.
Here’s an example of how rate abatement works: Say you want to lease a 5,000 square foot office in a Class A building and the asking price is $16/sf or $80,000/year.
You could have your broker ask for a rent reduction to $15/sf, for year-one savings of $5,000.
Alternatively, you could agree to the asking price of $16/sf but have your broker ask for a 2-month rent abatement saving more than $13,000 in your first year.
It may seem like a no-brainer to take $13,000 in rate abatement savings over $5,000 in rent reduction savings, but there’s more to consider.
Unlike a residential lease which is typically a year-long contract, commercial leases on average are 3-to-7-year terms, and subsequent years’ rent and rent escalations will be based on the initial cost per square foot.
A rent escalation schedule is often part of a commercial real estate contract. Let’s continue with our example adding a 5-year lease term with a 3 percent escalation rate:
If you choose to have your broker ask for the rent reduction to $15/sf, over the course of a 5-year lease you will pay a little over $398,000 in rent.
If you choose the two-month rent abatement at $16/sf over the course of a 5-year lease you will pay more than $411,000 in rent.
With the rent-abatement scenario now costing about $13,000 more in total than the rent reduction—just about the same amount you could save in year 1 with rate abatement—the year-one reduction savings of $5,000 has a long-term advantage.
The real question isn’t which represents the most savings. It’s whether you need the most savings today or overall.
Nuances in commercial leasing can be complicated and confusing, which is why having a licensed broker on your side can offer a real benefit. It’s important to discuss more than location, use and square footage with your tenant-representing broker. Understanding your business plan, revenue flow and other priorities will help them know what kinds of landlord concessions could offer the most help to you in lease negotiations.
Ready to speak with an Illinois Licensed Broker representing tenants? Send us a message. And be sure to check back for our next Feasible Asks post: Term length & TI allowance.