As the nation’s economy moves toward recovery – despite lingering concerns about stock market volatility, tight credit markets, consumer spending and employment numbers – businesses still face difficult decisions about how to allocate scarce resources that can significantly impact their real estate decisions. In good times and bad, a smooth interaction between commercial landlords and tenants is vital to the successful execution of a leasing transaction. Given current conditions in the commercial real estate market, landlord and tenant cooperation is more important then ever in reaching a deal.

In this challenging business environment, landlords should have a good understanding of their competition as well as tenant needs, and tenants should know as much as possible about their landlord. Knowledge is power in today’s market. For all parties to reach a fair and satisfying result, landlord and tenant brokers must educate their clients about the reality of the market landscape. Softening office markets across the country have dramatically increased available office space for lease, even as fewer tenants are interested in leasing it. This dynamic creates downward pressure on rental rates.

Commercial real estate transactions in the current economy often feature a dramatic dichotomy of competing interests between tenants and landlords. Tenants tend to be extremely conservative about their present and future real estate needs. Whether relocating or renewing a lease, their appetite for capital outlay has substantially diminished. 


Many tenants are looking to minimize real estate expenditures in response to revenue reductions by subleasing excess space, using space more efficiently or offering employees new flexibility via programs like hoteling or work-from-home. 



Landlord Quandary


For landlords, market competition and a glut of available space is the driving force behind their decision making process. Many landlords find themselves capital-constrained, and have limited cash on hand to fund tenant improvements and base building costs. Despite these challenges, landlords remain focused on maintaining the value of the real estate. 


Several unique concerns for tenants and landlords have materialized as a result of the ongoing commercial real estate downturn. We find three major issues are recurring roadblocks in today’s leasing environment:


• Tenants have heightened concerns about their landlord’s financial viability. With imminent commercial foreclosures and credit in short supply, tenants are scrutinizing the finances of potential landlords. To overcome this challenge, landlords should take a proactive approach to fully informing potential tenants of the financial circumstances at play. 


• Secondly, there’s a need to manage the expectations of deal economics. Capital constraints are making large tenant improvement allowances a thing of the past. “As is” transactions are more frequent, 
which can be advantageous for tenants due to lower occupancy costs. 


• Meanwhile, with uncertainty and stagnation permeating the commercial real estate market, it is important for landlords to understand their competition. Leasing vacant space is exceptionally difficult in this environment. As both parties struggle to identify new business prospects, while simultaneously experiencing a shortfall of cash and credit, finding flexible and creative solutions to reaching a deal are critical.


A knowledgeable and experienced commercial real estate broker will play a key role in educating both tenants and landlords about the current economic realities of the market.


In light of these challenges, if a deal is to be consummated, both tenants and landlords must be willing to compromise on certain issues. To the extent that cooperation and expectation management can be part of the leasing process, a reasonable solution is far more achievable.

Despite these competing interests, finding the middle ground is essential to finding a fair solution for both landlord and tenant. Brokers should work towards this goal by educating their clients and offering realistic solutions to move towards a compromise and ultimately a deal.

Duncan Gratton and Mike Brown are partners at Boston-based FHO Partners.