Commercial real estate market conditions have shifted dramatically in favor of tenants, particularly in the office and retail sectors. Vacancy rates in major markets remain elevated, and landlords who once dictated terms are now willing to offer concessions that would have been unthinkable three years ago.
Tenants entering or renewing commercial leases should be aggressively negotiating free rent periods. In many markets, landlords are offering six to twelve months of free rent on five-year deals as an inducement to secure creditworthy tenants. This is especially true for spaces over 5,000 square feet that have been vacant for more than six months.
Tenant improvement allowances have also increased substantially. Rather than accepting landlord-standard finishes, tenants should negotiate for cash TI allowances that allow them to customize buildouts to their specifications. Current market rates in many CBD markets are running $80-$120 per square foot for office space — well above historical norms.
Lease flexibility clauses are more attainable than ever. Tenants should push for early termination rights (typically exercisable after year three with six months notice and a modest penalty), assignment rights to affiliates without landlord consent, and expansion options at predetermined rates.
Personal guarantee provisions deserve careful attention. Landlords will still seek personal guarantees from principals of smaller tenants, but the structure of these guarantees is negotiable. Burns-off provisions, where the guarantee reduces over time as the tenant establishes a payment history, are increasingly common.
If you are renewing an existing lease, do not simply accept the landlord's renewal proposal. Current market conditions almost always support significant concessions from an incumbent tenant's perspective, but landlords will not volunteer these improvements — they must be negotiated.