Negotiate for Concessions that Make High Rent Worth It
While the rental rate for retail or office building space seems cut and dried, many factors go into the ultimate amount you’ll end up paying. Any rent abatement, free rent negotiated, or other concessions will bring down rent figures. But so-called “face rates” can be a driving force behind pricing for commercial space. This is true particularly in troubled real estate markets. So, before you go into negotiations, familiarize yourself with the market you’re in and the concept of face rates, and be prepared to negotiate a realistic balance between those rates and concessions that you’ll fight for.
Historically, owners have been less likely to reduce face rates—that is, the nominal rate of rent asked for by an owner, as opposed to the effective rate of rent that’s calculated after rent abatement is taken into consideration—because they directly impact a building’s valuation. Owners have always been more interested in front-loading concessions like free rent and tenant improvement contributions to keep face rates high while satisfying tenants with a lower effective rate.
Nonetheless, don’t be afraid to negotiate with a potential or current owner for a reduced face rate. But even if your market is down, don’t fall into the trap of having an overinflated sense of what owners will do to make deals. At the end of the day, owners still need to make deals that make sense. Recognize that owners can do only so much without putting themselves in jeopardy. Understand what’s realistic and what can be achieved in your particular market before you look for properties, so that your expectations can be met.
For a two-part strategy to get a balance between face rates and concessions, see “Push for Concessions that Compensate for High Rental Rate,” available to subscribers here.