Now we are getting to what people generally think of as the “fun” part of commercial real estate: kicking the tires on properties and working on the deal. At times, finding the right building, getting a good deal, and winning an intense negotiation can be fun. Other times, it can become a tough process where finding the right building takes months and getting a good deal means simply getting the best deal you can. Sometimes, winning an intense negotiation results in some loss of goodwill. This chapter will steer you toward a more positive process.
Market engagement is not only important when your lease is up and you want to move—it is also important when you want to renew your lease and stay put. If you want to have leverage in your renewal negotiations, your landlord should know you have actively and intelligently evaluated your business plans and your property needs. My team handles dozens of renewals each year, and we have found that the discovery process of market engagement always leads to new insights, negotiating strategies, and ultimately, landlord concessions.
ASSEMBLE OPPORTUNITIES
When it comes to assembling opportunities, the best brokers find what is available and discover what is off market. We will focus here on looking at the spectrum of effort needed to find the right opportunity, so you understand which approach is appropriate for your situation.
Let us talk about a typical small space. It might require utilizing the basic multiple listing service (MLS), filtering opportunities, prioritizing them, setting up a tour, and selecting a match. It is simple, straightforward, and everybody is happy. These are the experiences people have in mind when they are thinking about doing it themselves. I have found this works when you need less than 2,000 square feet of warehouse with two offices, a restroom, and a roll-up door. When dealing with small spaces, try to keep it simple.
On the other side of the spectrum are the larger, more sophisticated searches you might read about in the news: Tesla’s Reno Gigafactory, Amazon’s HQ2 property search, or Toyota moving its headquarters from California to Texas. This type of search might require teams of consultants evaluating different factors like labor wages and availability, economic tax incentives, supply chain and logistics of inbound raw materials, outbound finished goods, utility availability and rates, feasibility studies, land site availability, different property developer partners, and more. It can take months to understand feasibility, and years of execution to result in a new plant that is open and operating.
In this book, I am focusing on where most deals take place: the middle ground, in the range of 20,000 to 500,000 square feet. In these situations, finding the right property can have an extraordinary impact on the future success of the company. The property can help or hinder the company’s culture, productivity, and efficiency.
One of the primary roles of your broker is finding property opportunities for you. This goes way beyond a quick search of the MLS.
A great broker leverages relationships within the brokerage community to find opportunities that are not yet available. Here are some of the most common ways I do this:
- Communicate with other brokers who represent landlords and have similar listings. Frequently, these brokers will have long-term relationships with their landlord clients and will know about other spaces coming to market within the next six to twelve months. Because I have built a relationship with each broker over time, they trust me, and they can usually ask questions of their clients to find additional opportunities.
- Communicate with institutional investors and developers about their rent rolls. It is only through years of working with them that I have found it is possible to find opportunities that are not publicly available. This is about 25 to 30 percent of the market, which companies would not know about otherwise.
- Speak with the investment community about their acquisitions pipeline. Some investors, both private high-net-worth individuals and large institutions, purchase vacant properties that need tenants. These same investors will buy additional property based on having a known tenant to lease that property. We can sometimes find a property that is for sale and line up a purchase subject to the successful simultaneous negotiation of a lease with our clients. This is called the “tenant in tow” method.
- Brainstorm with developers who own land sites about their plans to build new industrial buildings. We have found that industrial developers will develop based on speculative building features and characteristics when they do not already have a tenant. When they do have a tenant interested in their land site, they will customize their plans to suit the needs of this prospective tenant. This tailoring of the site, structure, and interior build-out can be a great way to create a win-win solution for clients and developers alike.
- I market client requirements directly to private property owners through my phone, email, and postcards, utilizing my proprietary property database. This often leads to new opportunities where my clients do not have to compete with the market to win favorable terms.
- I market my clients’ requirements on LinkedIn. I invest and engage far and wide in my LinkedIn social media Rolodex of contacts for this specific reason. I have regularly found new, timely opportunities for my clients by broadcasting our geographic area, size, clearance, and timing to the wider brokerage and investment community.
PROPERTY TOURS
Property tours are fun. Most executives enjoy getting into the marketplace to see, touch, and feel each property to judge how well it matches their vision for their company’s future. At a minimum, the broker should vet the industrial property frequently, and the project champion and internal team will vet it as well, before it is worth the executive’s time.
Great tours are flexible and adaptable based on real-time feedback. Some properties that seem like a perfect fit end up being dismissed based on small factors. A broker’s job is to make the best opportunities available for the executive on a silver platter, so the executive can pick and choose as their vision allows.
In advance of any tour, we prepare a short list of three to five available buildings, prioritized by the overall fit to the client’s needs, operationally and financially. Tours usually last one to four hours, including drive time and coffee or lunch as needed.
The circumstances of the tour are different for each building. Some properties may be vacant, and an owner’s representative will need to be present. Some properties with existing tenants may require notice before allowing visitors. Some properties will only accommodate tours at specific times, based on the existing tenant’s schedule or shift changes. Others may have forklifts, equipment, or machines running while you are in the building. Many have safety protocols for hard hats, face masks, smocks, or staying on a specific path of travel to ensure everybody’s safety.
INITIAL INSPECTIONS
When I am touring with clients, I usually take notes of what they like and what they do not like. I then take that analysis back to integrate and reprioritize our list of opportunities to determine future action. I like to inspect properties outside to inside, top to bottom, front to back.
On the outside, you must be able to get through the highways, streets, and driveways to find the building. You need to be able to get to the parking lot and through the access ways to safely reach the entrance. The building image needs to match, or have the ability to match, the company’s culture. We often take inventory of the surrounding neighbors, from both an image and a use perspective. You will not be able to change your neighboring business’s image, but you can use it to understand the local property zoning and any business park covenants, conditions, and restrictions (CC&Rs) that might restrict specific uses from the project. The zoning and CC&Rs, or lack of CC&Rs, could mean the difference between an unsightly tow yard moving in next to you mid-lease, or a nice, clean corporate neighbor. It is also good to know whether your neighbors have any environmentally hazardous processes that might cause odor, air hazards, or soil or groundwater issues.
On the inside, we usually start with the office and make sure there is enough space for each department and each key personnel. We then look at the construction of the office ceiling grid, height, penetrations, lighting methods, layout efficiency, orientation of restrooms, path of travel, and any Americans with Disabilities Act (ADA) considerations. We usually do not take too much stock of existing flooring, as it is usually slated to be replaced for a new office build-out.
As we pass through the office into the warehouse, we look at the warehouse ceiling height(s). Ceiling height advertisements are not always verified, so it is worth bringing a laser measurer to check where the roof meets the concrete tilt-up panel, and the height in the middle of the warehouse, on the underside of the lowest laminated wood beam. Industrial building roofs with laminated wood beams often bow in different areas of the warehouse.
Fire sprinkler pipes and sprinkler heads will be lower than the roof girders and support beams. The roof height and sprinkler system are essential to determine how high you can rack. Sky- lights and insulation provide clues as to the roof condition, as both will show signs of active and prior water intrusion. An optimal quantity of skylights can lead to electricity savings by increasing natural light in the warehouse, but skylights are also the weakest part of the roof structure. We ask when the roof and skylights were replaced, to know what kind of risk is involved, and who is responsible for fixing leaks.
It is helpful to look at the condition of the warehouse floor. A concrete slab tells you a story. You will be able to notice where machines used to be located, past water leaks, racking bolt divots, cracks, unsettled panels, expansive soils, signs of environmental testing, and more. Looking at the warehouse floor is like playing “Sherlock Holmes,” where you can see into the past by looking at the present condition. This will help you understand what kind of work the foundation may need in order to be suitable for your needs.
This tour is a chance to see how each item on your programming list relates to the physical environment and condition of the present building. This forms the basis for your future inspections, contractor bids, and landlord negotiations. The tour is also a chance to bond with your team and create the right experience for the client so they can make the most of the opportunity.
VENDOR WALK-THROUGHS
Inevitably, you will need to make changes to the property and adjust the project plan to tailor both to the realities of the marketplace. So, after the initial inspection, it is prudent to schedule a second walk-through for the architect, general contractor, internal teams, and external vendors. They will be responsible for creating solutions and providing cost estimates. It is usually best to schedule this for a day when vendors will minimally disrupt any existing tenants.
You will find that a good architect or project manager can save everyone lots of time because they work with general contractors and subcontractors daily and can accurately estimate pricing. Pricing estimates save time when making assumptions and filtering properties during feasibility. We can then further revise our assumptions when we go through the space planning, pricing plan, and general-contractor bidding process.
If there is a high probability you will be renewing your lease, yet you are in the market to ensure you have credible alternatives available to you, this is where you have to use your best judgment as to whether or not it makes sense to bring the vendors back, or to engage in the space-planning process below.
SPACE PLANNING
We think about initial space planning during the tour to help you think through what changes need to be made in order to make the fit optimal.
We start with the reception area, where visitors gain a first impression of your company’s brand and culture. Imagine walking in the door and seeing just one small room with a dark-stained wood reception desk, dim lighting, gray commercial-grade carpet, and a sign tacked onto the drywall in the back of the reception area. This is usually what you imagine when you think of a small warehouse unit. Functional but uninspiring.
Now imagine you walk into a space with natural light and an open feel. Your first step into the space is on polished concrete with a sheen that reflects the circular LED lighting hanging from the rafters above you. You see a reception station that seems to waterfall over the counter’s edge, set in front of a wall displaying the company logo.
With a few key design choices up front, it is possible to tie in details to connect your space and your brand, showing visitors their experience is important to you. Consider the conference rooms, the kitchens, and the restrooms.
Conference room tables and seating are always a point of contention between the executive who wants to reuse that old wooden fifteen-foot conference table from the 1970s, and the executive who wants a two-thousand-pound solid marble slab imported from Italy. I joke, but you would be surprised how often people think they need a certain type of conference room, only to create a very large or elaborate one that is used infrequently.
Today’s trends in kitchens and copy rooms turn them into open areas that double as cafés and work areas. They are often oriented so they can be open for collaboration without bringing excessive noise into the rest of the office. This means break rooms and copy rooms are no longer dark, dingy, disconnected places.
The best part of tenant improvements is that when they are designed early in the space-planning process and included within the tenant improvement package, the landlord can construct them for you. This is where early and thoughtful engagement within the process can pay dividends.
The deliverables here, in a perfect world, are a floor plan and site plan including all the changes needed, along with an overlay of furniture, racking, and machinery. This drawing may be from an architect, furniture vendor, material handling consultant, industrial engineer, or all four. What is important is that someone has all of these in one place and has thought through their relation to one another.
FIND THE RIGHT COMPETITIVE NEGOTIATION BALANCE
Once you have found the right building, it is time to negotiate terms.
There are limits and balance to negotiating, of course. You will see some “tenant rep only” firms take an overly aggressive tack in this process and string along multiple landlords to the point that each one spends money on their behalf to create plans and carefully craft legal contract documents, which only become leverage. The reps can often take a “win at all costs” mentality and create a lot of dissatisfaction along the way. I am all for maximizing opportunities for clients, but only in a way that is honest and genuine.
Another such balance is between your current and prospective landlord. Rarely is it practical or desirable to need more than three options to create the optimal outcome. How you negotiate will depend on the market dynamic.
When talking to brokers who represent landlords, I gauge their property’s activity levels. Some brokers can be intentionally vague about their interest in a given property, thinking this approach gives them a better chance of bringing their client the most opportunities. I have learned to clearly ask landlord
brokers if they have any current proposals and make them objectively answer this question. This direct question will allow you to finalize how you prioritize that property.
Each company will have a different tactic when it comes to negotiating on multiple buildings. The rule here is that you should only negotiate on buildings you would sincerely sign a lease on if the terms were favorable. This sincerity can sometimes lead executives to negotiate on just one property in good faith. This is because there is usually a small window of time to identify the perfect fit and secure it without competing.
That said, I work on several negotiations a year where we put out requests for proposals to multiple landlords on multiple buildings, filter and analyze all the responses, and then decide which landlords to engage further. Think of it like the NCAA March Madness tournament where there is a bracket of college basketball teams and each one faces off against others. We all obsessively watch the results until there are two teams remaining that tensely battle back and forth until the last seconds on the clock, resulting in an undisputed winner. Which tactic we take is determined by the market dynamic.
NEXT STEPS
Market engagement is the precursor to lease proposal negotiations, lease contract negotiations, construction, and relocation. It is this market engagement that sets the stage for everything that will materialize in the future. There is a literal translation from what your team sees in the field to what we negotiate in lease proposals. This forms the backbone for the work of the landlord’s attorney in drafting the final lease document, which will include the construction drawings and work letter.
This direct relationship between market engagement and future success of the company is the reason why we usually tour the same properties multiple times, with multiple team members. We enjoy having every team member evaluate the property with their unique perspective to ensure that all relevant property-related concerns are addressed within the lease proposal and the ensuing lease contract negotiation. Now it is time to talk about how we structure that lease proposal.