Summer of Stabilization
Today's majority of today's market velocity is in the lease renewal part of the market. While we find the bottom of the market, landlords and tenants alike are trying to do the best they can to preserve their current properties and kick the can to get to a better market. Because of this there is a lot of posturing in the lease renewal negotiations. We regularly engage landlords on tenant's behalf, and tenant's on landlord's behalf so we're used to being in the middle and candidly, we are only successful, if we find an agreement that works for both parties so we love understanding each parties situation and crafting an agreement that aligns with both parties interests. In that spirit, I thought it important to focus this months newsletters on Renewal Options as these are commonly asked for, rarely uses, and as you will see, fraught with problems. Bottom line, 95% of the time, it is better to negotiate with two parties, two brokers, and one agreement that is hammered out together taking in both parties concerns factoring all information relevant to the decision without limitations.
Renewal Options
"We don't ask for lease renewal options because if we are all being reasonable people, we'll be able to figure out a deal when that time comes," said my best longest standing national tenant rep client. And so we have negotiated without them for 20 years across the country with all of the major institutional landlords.
However, most tenants ask for them like Skittles at summer camp. It is challenging to solve a future negotiation without knowing the context it is going to be used in. Either way, we look to craft for balanced language that will hold up well for both parties over time as the market changes as no market lasts for ever.
Here are a few considerations: * When you exercise your lease renewal option for another 5 years, when should you start negotiating the new lease terms? Right when you give notice to exercise your renewal (but that's 9-12 months before your new lease will start)? Sometime in the middle (4-6 months from the new lease start)? Or right before the new lease start (1-4 months)? * What terms are being negotiated? Base rate, annual bumps, TI's, and free rent? Should there be free rent in a lease renewal? Should there be TI's? If you cannot agree on an renewal option lease and it goes to arbitration, does the arbiter decide when to give free rent and TI's if the lease is silent on that matter? What if all the other deals in the market have them? What if only new deals have them? How do you account for that? * When you are structuring the deal, can you use lease comps on new direct deals or only on renewal deals? Can you use lease comps for the same term or can you use 3, 4, 6, and 7 year lease comps as well? Can you use old lease comps from 6-12 months ago? Can you speed up or delay your rent negotiation in favor of new higher or lower comps to come available? * When comparing deals, should you Gross up all lease comps (meaning that you include not just the base rent but also the operating expenses like property taxes, insurance and common area maintenance) so you are comparing ables to apples? Should you have use Net Effective Rent calculations to take into account concessions? Should you Gross Up your Net Effective Rents thereafter? * How should you adjust for different building characteristics like ceiling height, office, truck court, trailers stalls, etc when structuring your lease?
It's an imperfect situation that is rarely used but if you are in the game long enough you will see lease options being asked for, being given, being negotiated, being used, and being disputed. The key here is to do the best you can to honor the spirit of the agreement between the two parties at the time it was negotiated and understand what is customary.
If you are looking at a lease expiration and have an option to renew that you are thinking about using and wondering what you should do, feel free to ask us how to approach the situation. We've handled our fair share.
Book 3 Announcement - Industrial Investment
It's time to kick off the writing of my third book Industrial Investments (placeholder title to go with Industrial Intelligence and Industrial Income). This book will complete the trilogy and is moves away from the first two books focused on tenant leasing, and landlord leasing, and focus on what it takes for you for investors to buy properties for their own account and to scale a portfolio of properties. I will document my personal investment experience along with high level interviews from syndicators, high net worth, developers and institutional investors to bring in sophisticated and experienced insights from people scaling their own portfolios across the country. I'll cover Market Segmentation, Deal Flow, Underwriting, Due Diligence, Financing, Value Add Strategies, and Exit Strategies for starters. If you are reading this and want to participate in the interviews because you are a player in the industrial real estate investment marketplace, please send me a note and I'll get you on the schedule. These interviews have come to be one of the biggest impacts that I can provide the community in my writings and make sure the best advice is distributing to those trying their hardest to excel.
University of Arkansas, Walton School of Business - Supply Chain Management Master Candidate Class of 2024
Hopefully you don't think it obnoxious that I am going back to school for another fully employed masters program. I have been looking for a path forward to better service our clients with supply chain network optimization studies and found the University of Arkansas's Master of Supply Chain Management programs to be one of the best in the nation at this. It doesn't hurt that I have a close colleague joining me in this endeavor as well. It also helps that the program is in Fayetteville, Arkansas a stones through away from its sponsors Walmart, Tyson Foods and JB Hunt in next door Bentonville. This is the program that these large supply chain oriented businesses send their teams to, to further learn how to optimize their supply chains and who I'll be in class with. If you want us to provide a study that helps you figure out where to locate your next distribution center or manufacturing plant, please let me know.
Call to Action
We are working double time this summer as the bottoming of the market is increasing velocity. Tenants try to maximize concessions while they are present, and investors are increasingly re-entering the market with confidence to deploy capital. Reach out to Grant, Chris, or me to discuss how we can start adding value for you today.
Best Regards,
Justin
Justin Smith, SIOR
jbsmith@lee (mailto:jbsmith@lee-associates.com) irvine.com (mailto:jbsmith@leeirvine.com?subject=Newsletter%20Follow%20Up)
949.400.4786
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