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Finding Ways to Wrangle a Rent Reduction

01 Mar2009

Finding Ways to Wrangle a Rent Reduction

With commercial vacancies rising, now is the time for leaseholders to seek a better deal.

Here’s a piece of precious good news in the real estate market: It’s a great time for commercial tenants in Manhattan to renegotiate their leases.

Tenants have the advantage right now. According to data from CB Richard Ellis, 11% of Manhattan’s office space was available in late 2008, compared with 8.2% a year earlier.

The market is clearly changing,” says Gerry Miovski, senior vice president, downtown Manhattan, at CB Richard Ellis. “Availabilities are up, vacancy is up and pricing is down slightly. Tenants have more leverage … and can get a better deal.”

Leaseholders can use a broker or contact a landlord directly.They can expect to pay a broker or real estate lawyer the same charge for a renegotiated lease as they would for a new one. It will typically be some combination of a flat fee and a percentage of the rent.

In Manhattan, businesses downtown and in midtown south are the best-positioned. CB Richard Ellis data show that average asking rents in midtown were $80.87 a square foot at the end of 2008—down only slightly from $82.15 a year earlier, even though the big banks headquartered there have lost entire floors of employees.

Downtown is a comparative bargain, at an average of $49.19 a square foot, as is midtown south – from 35th Street to 14th Street – at $52.46.

Howard E. Greenberg is a tenant broker and president of Howard Properties Ltd./Corfac International, in White Plains, N.Y. Mr. Greenberg points out that tenants wanting new leases can also find bargains. He recently worked out a deal for more space but at a lower total rent for one firm. The client moved into 48,000 square feet downtown, at 120 Broadway, from 26,000 square feet in midtown, at 99 Park Ave.

It might pay to wait a bit before trying to renegotiate. Renters in midtown could see more flexibility on the part of landlords as more space comes on the market, Mr. Greenberg says. Companies subleasing space they no longer need are undercutting the market further.

Financial service firms that hold leases must pay for the space whether or not they occupy it, Mr. Greenberg notes. “Eighty cents on the dollar is better than nothing,” he says. “If they’ve been in a space for five years at $50 a foot and it’s now worth $70, the bank is still going to make money even if they’re not pulling in market rates.”

Reliable commercial tenants with a few years left on their lease are also in a solid bargaining position, insiders say. A proposal to reduce rent in exchange for locking in another contract gives landlords a good reason to do the deal.
Tenants can also attempt to work out a temporary rent reduction, agreeing to revert to higher rates when business improves.

A company at risk of going under in the recession should use that fact, says Jeffrey P. Orlan, who represents landlords and tenants in his solo law practice in Westchester and Rockland counties.

Mr. Greenberg echoes that argument, saying that with some buildings only 50% to 90% full, landlords would rather give good tenants a rent break than lose them.
Josh Dionne, president of JMD Realty Advisors Inc., represents some tenants that have renegotiated leases they signed only recently.

The stumbling economy puts tenants more in control than they were a year ago, Mr. Dionne says, especially when they have 5,000 square feet or more. “Landlords love midsize tenants of 5,000 to 30,000 square feet, and those tenants can force the landlord’s hand to get the best lease terms possible,” he says.
The first step is reaching out.

“The tenant doesn’t lose anything by giving the landlord a call and discussing a situation that would be mutually satisfactory,” Mr. Orlan says. But before doing that, he adds, tenants should “think through what reduction they want and what they’re [willing] to give up in exchange.”

Howard Properties, Ltd., which is headquartered in White Plains, NY, specializes in tenant representation and real estate consulting. Founded by veteran commercial broker Howard Greenberg in 1998, Howard Properties has completed space acquisitions, dispositions, lease renegotiations and consulting assignments in 20 states. The firm is an affiliate member of CORFAC International, an association of independent real estate brokerage firms represented in more than 150 markets in The Americas and Internationally.