Opportunity is Knocking for Seattle Area Office Tenants

How Seattle area tenants can make the most out of the 2021–22 office market

Without a doubt 2021 will be a year of “price discovery” as the previously overheated Seattle area office leasing market cools off. You can expect to see rents drop as the spread between sublease and direct space widens while most tenants opt to stay at home until 2022. This, along with growing vacancies and negative rent growth will present office tenants the best leasing market in more than a decade.

“Leverage (lev’ er-ij) n. The ability to create maximum results with a minimum expenditure of resources”

Leverage is the single most important thing that a Tenant must use to maximize their results in lease negotiations. The one with the leverage dictates the deal terms. Forget tricks and tactics. The reality is simply that you have to get leverage, maintain leverage, and know how to use leverage to get the best deal on your next office lease.

In the coming months, Puget Sound region tenants will have increasing leverage as the market erodes. Tenants who know how to use will execute grea leases for their firms. This opportunity will be wasted however, if tenants don't consciously apply leverage in their lease transactions.

How Tenants Can Use Maximum Leverage to Get Better Office Lease Deals:

Look for Areas of Alignment —

It has been said that good negotiators are “hard on the process and soft on the people”. Tenants should take this to heart and use empathy to understand their negotiating opposites needs and point of view. This focus will help tenants find additional areas of overlapping alignment of needs where tenants can benefit their landlord. Tenants that know the full stock value of what they bring to a landlord will have more conviction to drive leverage to make a better deal.

Keep Time on Your Side —

Get started early so you are not forced to negotiate with your back against the wall. My experience is that most tenants underestimate the time they need to get through the process of finding space and negotiating a great lease. The actual time required varies from assignment to assignment: Smaller space with only minor tenant improvements can take a little as three to six months. On larger leases tenants should allow at least nine months to get through the entire process. Any delay can cause a tenant to be squeezed for time and find themselves compromising negotiations because of a looming deadline.

Deadlines are useful tools that tenants can use in negotiations. It’s good to establish and enforce deadlines to keep the deal moving in the right direction. When deadlines are missed by inadequately prepared tenants, urgency can be lost, which can really kill a deal. On the other hand it is important not to be pushed by a deadline because landlords tend to give up larger concessions toward the end of a lease negotiation. Landlord’s typically only give up token concessions early on. Its important to keep time on your side because they really give on the big items when they think it will push the deal over the finish line.

Look Beyond Market Noise for the Most Useful Information

There are tons of broker market reports that a tenant will find on-line. Most of the information found online is produced by brokers representing landlords and is of very little use to the tenant. Some of it can actually be misleading. Knowing what landlords are quoting for asking market rent is much less useful than knowing what terms specific deals that are actually being done in comparable buildings. It is useless for tenants to know what space the biggest tenant in the market took and what they paid. Tenants need to know what space is available that suits their needs, what concessions they should expect and where deals for similar space is landing. There are three kinds of information every tenant must have when negotiating a lease:

· Tenant Priorities — Tenants need to be clear on their needs and priorities in order to negotiate decisively. What space needs do they have and what do they anticipate in the future? What is the budget for space? What locations will they consider? What rights and terms are most important for them to have in the lease in order to meet their ongoing space needs.

· The Marketplace — Tenants need to have accurate information on the marketplace. The more specific the better. A tenant looking for 10,000 sf in a multi-tenant building needs to find information on buildings with 10,000 sf available. They will find the fact that Amazon is willing to pay top dollar to occupy and entire class A building of very little value . Broader market statistics are generally driven by the big space users in the market. While this information is a useful gauge on the markets direction, it wont help tenants that are looking for facts about specific spaces that meets their needs.

· The Landlord — Information about the landlord will give you some clue about how they negotiate and tell you what items they can bend on. For example, a landlord who has owned a building for many years, has little or no debt on the building, and has maintained a stable cash flow may, not be willing to borrow funds to invest heavily in tenant improvements. They may however trade off lower rent for tenant improvement cost avoidance. On the other hand, a landlord with a new project under construction or a “merchant developer” who is planning on selling the building may be constrained by valuation requirements that dictate higher rents and better credit tenants. These owners will likely give greater concessions in free rent, moving allowances and tenant improvement allowances in order to get a higher face lease rate.

Leverage Your Competitive Advantage

In order to drive the best deal, it is essential to create competition for your business. Tenants can do this by having several available options. First, be sure your broker has surveyed all the available space (not just their company listings) that satisfies your needs. After you have a “short list” of qualified properties meeting your needs, you must maintain leverage all the way to the end of the negotiations. In my experience, most brokers simply don’t do this. They want to get a quick deal done and default too quickly to a single property without aggressively pushing back on important deal points. Tenants then miss out on leveraging the big items they can get during the later stages of negotiation.

Will your firm take advantage of the best market in a decade?

It’s up to you. In the next 24 months, Seattle area tenants will be presented with the best office leasing market in over a decade. They will need to drive competition through leverage to make the most of it. The best way to do this is to engage a broker that only represents tenants with conviction to leverage time, information, and competition to drive the very best deal.

About the Author:

Eric Postle is the Managing Principal at ITRA Global Seattle, an organization dedicated to representing the best interests of tenants and buyers of commercial real estate. Eric can be reached at epostle@itraglobal.com or 425–830–3000.