Tenant representation

All Tenants All the Time

Tenant representatives offer a different view of the corner office.

In the office leasing industry, many brokers represent both landlords and tenants and, depending on the market cycle, look to one or the other for the bulk of their business. Yet in a booming office market with ample new construction, brokers tend to focus on landlords and leasing as this market phase generates dynamic demand for space. When the office market goes dormant, as it has been for the last four years in many U.S. cities, brokers often shift their energies toward tenant representation.

Regardless of market cycles, an estimated 3 percent to 10 percent of brokers focus exclusively on representing tenants. While maintaining good landlord relationships and following win-win negotiation strategies, their bias is strictly in favor of their clients. In addition, these specialized commercial real estate brokers utilize market nuances and work in conjunction with tenants’ legal advisers to structure lease clauses and terms that best meet their clients’ needs.

Although they sit across the negotiating table, brokers representing office landlords and their own buildings recognize that tenant reps have what they want: clients who need space. Landlords and brokers marketing available office space should develop a clear understanding of the tenant rep’s role and build strong relationships with these professionals to most effectively position space in the marketplace.

A Tenant Focus

Brokers who represent landlords should understand tenant reps’ client base. Many office tenants are not Fortune 500 companies; they are small and medium-sized businesses that experience the office leasing process every five or 10 years.

While many small office buildings are owned by individuals or partnerships, the majority of large office complexes are owned by institutional investors that employ professional property and asset managers. Professional landlords also employ their own brokerage listing agents who monitor the competition’s lease terms and conditions. They know how many months of free rent are allowed and how large the tenant improvement allowances are for all the comparable leases in the market. They also know what types of options they might have to offer to specific tenants based on the tenant’s credit, the transaction’s size, and the current state of the market.

Tenants that retain their own exclusive representation essentially level the playing field by gaining access to critical market information. Tenant reps know the nuances and negotiation hot points that can best serve their clients, such as knowing that a landlord is in the process of refinancing and is prepared to make an exceptionally attractive lease to enhance its financing terms.

Experienced tenant reps also are aware of long-term bargain sublease opportunities that may be far more attractive economically than a direct lease and can skillfully point out the benefits and drawbacks of such alternatives.

When it comes to lease renewals, many in the industry wonder why tenants would hire professionals to represent their interests. The answer is straightforward: When tenants do not go to the marketplace to fully determine whether the renewal terms and conditions are competitive, they almost always lose. Knowledgeable landlords keep pace with the marketplace and fully appreciate the financial rewards to the property owner when tenants enter lease renewal negotiations without a broker and without bringing alternative locations into competitive play.

Building Relationships

Both on broker-to-broker and landlord-to-broker levels, relationships are critical to dealing with tenant representatives. Belonging to professional organizations, such as CCIM Institute, further enhances the long-term effect of professional interaction. The networking opportunities and increased level of trust associated with fellow designees more than pays for a lifetime of membership dues.

How landlords and their agents treat tenant brokers during a landlord’s market is critical to how tenant reps view these same landlords during a tenant’s market. Landlords who believe their office buildings are their castles often raise the drawbridge at full occupancy, hoping to keep out relocation solicitations. However, when vacancies increase, the drawbridge comes down. Such behavior indicates that the landlord has forgotten the tenant reps’ role in introducing clients to the landlord’s space.

In addition, respecting tenant reps’ relationships with their clients is important. Landlords should direct all communication and negotiations through the tenant rep — not directly to the client. Another indication of respect is their behavior in tight markets or when a tenant rep represents an existing tenant on a lease renewal.

Marketing Basics

Landlords and their agents can best market their properties by following a few basic steps. The most important — keeping the brokerage community informed — can be accomplished through simultaneous strategies.

Brochures. Unfortunately many agents are content to send a single HTML or PDF marketing flier. However, creative repetition can greatly enhance the brokerage community’s awareness of available space. E-mailing PDF files with space details and floor plans can be followed up with mailed brochures. Agents representing the better-marketed properties often send out reminder mailers, both as HTML e-mails and PDF attachments.

Incentives. Brokerage fees and incentives usually increase in soft markets as landlords attempt to position their buildings at the top of brokers’ A lists. While broker incentives, such as new cars, in addition to commission fees, might attract attention, very few brokers would accept a car over a higher commission. This is especially true in a soft office market where transactions move slower and substantially fewer take place. Despite the razzle-dazzle of incentive programs, procuring brokers often prefer to receive a full fee.

However, the promotional aspect of incentives can be an effective way to attract attention. Word-of-mouth publicity within the brokerage community often is generated by incentive programs that push the envelope. A good example is a program where the procuring broker who brings in a subtenant can choose from high-end incentives, such as a new Porsche, 300 mini-motorcycles, or a Chuck E. Cheese’s party for 3,000 of his or her closest friends. The visual aspect also can attract attention, such as lining up bonus car prizes outside a featured building with a Lamborghini taking center stage. While these programs may attract attention, brokers rarely select non-cash incentives. They almost always request and receive a leasing fee commensurate with the assignment.

Open houses. Broker open houses can get the marketing ball rolling, but attendance should match the type of tenancy needed. For example, landlords with large blocks of office space want to attract senior brokers who represent large corporate clients. Draws such as weekend getaways won by 50 percent of the attendees significantly increase open-house attendance.

Events. Staging events at open houses also increases awareness and publicity. For instance, market forecasts by junior brokers of the major brokerage houses may attract both news coverage and attendance by more-experienced brokers. In another example, a sublease open house invited all attending brokers to display their available sublease space. More than 1.5 million square feet of nearby office sublease space was on display and competing brokers presented their space to the entire audience. The event attracted a large crowd and was featured in local business papers.

The point of marketing materials, incentives, open houses, and events is the same: creating awareness in tenant representatives’ minds of property for lease. Tenant reps must be aware of a building before they can expose clients to the space. A marketing campaign with a sense of fun and interest indicates a landlord or building agent willing to engage tenant reps’ interest.

Tenant Representation’s Future

A recurring question is the evolving role of the Internet in finding and negotiating office space. While the Web may facilitate information gathering and technology may allow quicker responses, easier lease redrafting, and other such benefits, commercial real estate is still a person-to-person business. For example, office tenants can locate corporate sales office availability online, negotiate using phones and text messaging, and even digitally sign a lease without ever physically seeing the space. However, if this sales office is important to a client’s organization, someone has to make sure the views are not of a local eyesore, the neighborhood is safe, and the employees have nearby lunch and services facilities. The cost of office space is usually less than the cost of finding and hiring new employees. Thus, physical inspection of the office space prior to lease execution usually is mandatory and personal involvement in the transaction is a must.

Most Fortune 1000 corporations utilize tenant rep services in their relocation searches and a substantial number also use them during lease renewal negotiations. The exclusive tenant representative plays an increasingly valuable role on behalf of their office tenant clients. Whether it is a landlord’s or a tenant’s market, the experienced, market-savvy tenant representative has become an integral part of the office leasing landscape.

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