Category Archives: Research
Lead Time: Why is it important and how much is needed?
To properly maximize a tenant’s leverage when looking for space or renewing, the process needs to begin eleven to eighteen months ahead of the lease expiration date. This will enable the tenant to properly vet the market and execute a relocation should the terms of renewing be unsatisfactory. If the current landlord knows their tenant can relocate, they will most likely propose more favorable terms.
Tenants often overlook how in-depth and complex the negotiation process is. To properly negotiate a lease, whether renewing, or relocating, the tenant must follow these basic protocols to ensure their best interests.
- Evaluate and tour the market:
Any tenant should know their options and what the market bears. Surveying and subsequently touring available options will give the tenant knowledge of how much space is available as well as a general idea of market rates.
2. Issue Requests for Proposals (“RFP”) and evaluate proposals once received:
By requesting a formal proposal, the potential landlord will not only be providing written documentation, but also gain a sense of seriousness from the tenant. Most landlords are also aware that if they are receiving an RFP, there is a good chance others are as well. The RFP and subsequent proposal should address all major points of a lease, as well as any unique interests of the tenant. Once all proposals are received, it is important to run both qualitative and quantitative analyses for comparison.
3. Complete space plans of tenant’s top two or three choices:
A landlord will value a tenant’s seriousness and commitment if they are at this stage. By having a space plan completed, the tenant will know which space they are best suited for. They can also determine exactly how much space they need.
4. Negotiate terms and prepare a Letter of Intent (“LOI”):
At this stage, the tenant should have an idea of their preferred property. It is appropriate for both parties to counter with their final and best offers. A LOI is a non-binding agreement that states both parties are prepared to move forward with a lease document.
5. Prepare and finalize lease:
The LOI will provide the framework for a lease. It is imperative that the tenant have an attorney review the lease. Once all terms are agreed upon, the lease can be executed.
6. Construct the space:
Depending on the size of the space and extensiveness of the improvements, this stage can take up to several months. Local zoning, permitting and approvals will also play a major role in dictating the process.
In short, retention of a commercial real estate broker is imperative. A broker will be able to expertly guide the tenant through the process of either renewing or relocating. Since the broker is constantly assessing the market, they will have a knowledgeable idea of available space, rental rates, landlords and lease terms. Developing a relationship with a broker before a tenant talks with their landlord will give them the upper hand from the start. From a tenant’s perspective, utilizing lead time in negotiating a lease renewal gives the tenant leverage, which creates savings.
One definition of “shadow” is as follows: a reference to proximity, ominous oppressiveness, or sadness and gloom.
It is a common misconception that the term “vacant space” or “vacancy rate” is an indicator of all the space available in a given market or property. “Vacancy” simply refers to space that is not leased. However, “available space” or “availability rate” is a more accurate indicator of all the space available or will be available soon. The difference between vacant and available space is often referred to as “shadow space.” Shadow space is space that is currently occupied but is still being marketed for lease. The tenant does not have to physically occupy the space, they simply must be paying rent and have a lease on the space. A recent example of this is marked by Dollar Bank having announced they will be moving from Gateway Center to 20 Stanwix Street. The owner of Gateway Center knows of this upcoming vacancy and of its availability in the future, i.e. “shadow space.” This is different than sublease space in that shadow space can be directly marketed by the landlord.
At the end of Q3 2020 there was 4,402,254 square feet (SF) of available space either for lease or sublease in Pittsburgh’s Central Business District (“CBD”). Of this square footage, 3,731,808 SF is vacant. The difference of 670,446 SF is shadow space.
The amount of shadow space can be an indicator of economic conditions. Similar to sublease space, if there is more shadow space available, it is a sign that current tenants do not plan on renewing their leases or are downsizing. Typically, this is due either to a reduction in business or a downsized workforce.
At the end of 2019, the CBD had 684,308 SF of shadow space available. The availability was significant and represented 16.8% of all the available space on the market. Yet, as COVID-19 emerged over the next six months, the amount increased by a staggering 32.3% to represent 19.9% of the available space at 905,231 SF.
Going forward, as the COVID-19 pandemic continues, more shadow space is expected to come onto the market. At the same time, some of this space will turn vacant. It is very hard to predict or track shadow space because, by definition, the space is occupied. Just like any other market indicator or statistic, the variables are very fluid. Availability numbers are not to be confused or deceived by vacancy statistics. The true story lies in a vital combination of simple vacancy rates and the often overlooked yet very critical shadow space.