Challenges:
Our client, operating under a pre-pandemic office lease with annual 3% rent escalations, had two years remaining on their lease. Despite the remaining term, the client sought to take advantage of the post-pandemic office market in the San Francisco Bay Area to reduce costs. The goal was to unlock savings and increase profitability by either downsizing or renegotiating the current lease.
However, the Bay Area's commercial office market posed significant challenges. Many landlords were withholding current rates, and brokers were quoting inflated rates with large abatement packages that offered less savings than anticipated. This lack of transparency made it difficult to identify cost-effective relocation options. The building the client occupied was 35% vacant, but the landlord was not openly marketing available rates. Thus, we explored the possibility of a "Blend and Extend" strategy to renegotiate the lease while considering alternative relocation options.
Strategy and Solutions:
Our approach focused on gathering market intelligence and leveraging alternative options to negotiate favorable terms for the client. Key actions included:
1. Utilizing Broker Networks: To obtain competitive pricing for available spaces in the building, we tapped into our network of local agents. By discreetly engaging one of these agents to inquire about available spaces, we were able to uncover the asking rates and initial concession packages without revealing that the inquiry was on behalf of our client. This provided valuable insights that laid the foundation for negotiating a Blend and Extend agreement.
2. Market Research & Alternative Proposals: Simultaneously, we surveyed nearby submarkets and comparable properties, seeking viable relocation options for the client. This comprehensive market analysis helped us generate leverage for negotiations, demonstrating to the current landlord that the client was prepared to move if necessary.
3. Negotiation with Current Landlord: Armed with relocation proposals and market intelligence on the landlord's other spaces, we initiated discussions for a Blend and Extend lease structure. The landlord's willingness to negotiate quickly signaled their interest in retaining the client. We strategically paced the negotiations, signaling that relocation was a serious option, while balancing the urgency of avoiding further financial loss for the client.
Results:
Our team successfully negotiated a Blend and Extend agreement, achieving substantial cost savings and improved lease terms for the client. The key terms included:
● Lease Term: 84 months
● Rental Abatement: 2 months of rent abatement at the start of the lease
● Base Rent Reduction: $38.40/SF, reduced from $45.71/SF, representing a 16% cost reduction. This equated to monthly savings of $6,289, annual savings of $75,468, and total savings of $578,274 over the new term.
● Tenant Improvement Allowance: $20/SF (totaling $206k), with 50% convertible to additional rental abatement
These lease modifications allowed our client to significantly reduce occupancy costs and improve profitability on both a monthly and yearly basis.
