The Rise of the Small Office Tenant

Smaller office tenants have typically been occupants without much negotiating power. Now, in this post-pandemic era, they are finding their voice.

 

When Alina Clark was ready to approach her office landlord with a conversation about renegotiating the rent, she knew that mentioning the economic havoc wrought by the pandemic wouldn’t work. So the co-founder of CocoDoc, a software development company based in the Los Angeles area, tackled the problem in a different way.

“It’s easier to get cuts on things like maintenance costs and utilities, instead of the base rent,” she says. “We easily got a rent reduction by focusing on those, instead of the base rent.” It also helped that she assured the landlord the company was going to stay for the long term. “The fact that we were willing to commit for five years was one of the major considerations when renegotiating the lease agreement,” Clark says.

CocoDoc is one of millions of small businesses that make up the backbone of the commercial office sector.  They are not the Salesforces or JP Morgans of the corporate world by any means but their leases serve as an integral base for a building’s occupancy. But until recently, by virtue of their small size, they have had little sway with landlords when it came to renegotiating or negotiating a lease.

Then the pandemic happened and their fortunes changed.

Today, smaller tenants are in a position to negotiate better lease rates at a shorter term,  “The most significant expense for any office landlord is vacant space. The rising inventory of vacant and sublease space puts pressure on landlords and makes them more open to concessions and terms that favor the tenants.”

Most experts will advise on using a broker but there are some scenarios, such as renegotiating rent with an existing broker, where it can sense to do it yourself.

Just make sure you approach the landlord correctly and are armed with financial information.

When renegotiating with your landlord, be honest with respect to your financial challenges but also be optimistic about your ability to recover,  Negotiating with your landlord is no different than going into your bank for a loan.  If you go into the bank with your pockets inside out and desperate, are they going to extend you credit?  Not likely.  I coach my clients to tell their story in a way that will make the landlord invest in them.  And it is true—when a landlord gives you a rent abatement, he is investing in your business.

With the right attitude, tenants can strike all kinds of deals, says Nathan Murphy, co-founder of QuizBreaker, a small business that offers virtual team building activities for employees. “We were able to re-negotiate rent by believing we were in a growing industry that was going to skyrocket after seeing a recovery post-pandemic. By promising our landlord we would re-pay any debts we accumulated over the course of the pandemic, we were able to significantly reduce the amount we would have to pay as long as we recouped later on.”

Sometimes, though, a landlord needs more than a nudge to realize a tenant is serious about renegotiating space.

Christopher Adams, founder of ModestFish, was one of the countless businesspeople who struggled during the pandemic-led recession. “It got to the point where our office monthly rent was becoming too rich for our blood and we had to take steps to cut costs any way we could, starting with the rental price.”

Locked in a two year lease, Adams first tried sending emails, asking the landlord if he could lower the rent during the pandemic, and even proposed that he could make up the difference of a discounted rent in later months once the pandemic rescinded. “He would not accept any of this,” Adams said.

“What worked for us was this. We realized that the growth in office space vacancy has grown substantially since the pandemic began taking its toll, and we were prepared to change locations as a last resort, though that was never our primary intention. I made a call to our landlord and let them know that we were going to put in a 30 day notice that we will be terminating our lease, with 14 months still remaining,  and that they could keep the deposit with no issues, and gave best apologies in addition.”

Breaking a lease was a legal risk but Adams was hoping the growing vacancies in the building would play in his favor.

Something worked. The following day he received a call back from the landlord asking him if there was anything that they could do to accommodate us into staying in his building. “I let him know plain and simple, that the rent was more than we can budget for currently and we were planning on going into a building nearby that [was renting for less]. Right then, he asked if he lowered the rent for the duration of the lease, if we could stay.”