By Ronan Pigott (Vancouver)
I
recently felt compelled to write this post due to the fact that, on a very
regular basis, I find myself explaining to people outside of the commercial
real estate circle exactly what my colleagues and I do for our clients.
One
of the most common misunderstandings is the comprehensiveness and value of a
quality tenant- representation service. Fundamentally, tenant representation is
based on attaining the optimum result for a tenant’s office lease. To do this,
a tenant must have access to the most up-to-date market information, while also
having the ability to leverage the right skill set to negotiate with the modern-day
landlord.
In
Metro Vancouver, as in most large North American cities, office buildings are
owned and/or managed by large sophisticated private entities or institutional
groups such as real estate investment trusts (REITs), insurance companies, or
pension funds. Whether dealing with an existing tenant’s renewal or with a new
tenant during a lease transaction, the landlord’s goal is always to maximize shareholder
return.
To
do this, prudent landlords will arm themselves with the tools required by way
of expert representation and extensive market research. The obvious question: If
a professional landlord is taking these necessary steps, why wouldn’t a tenant
do the same?
What
does comprehensive tenant representation include? Although site identification
is fundamental, with the amount of information offered online through a
multitude of websites, it doesn’t take a high level of skill or professionalism
to prepare a list of potential locations. Exploring the market with the sole parameters
being size and location rarely renders the optimum locations. Two of the most common considerations that are
often overlooked are ownership structure and the building’s tenant profile.
The
modern landlord community consists of many different ownership types. What type
of ownership is the right fit for you, the tenant? Let’s explore a hypothetical
scenario. You identify an opportunity in an office building owned by a local
investor with few commercial holdings. Although this particular landlord is one
of the most diligent and reasonable landlords in the market, it doesn’t
necessarily mean that this ownership type will be the best fit for you.
This
is a big move for your organization and it is intended to be a long-term
commitment. In order to make this premises work for your organization, extensive
improvements and customizations must be made within the interior of the space
at a considerable cost. It is often the case that this type of landlord, as opposed
to a larger or institutional landlord, will be reluctant to contribute
financially to a tenant’s specific build-out.
It
is not necessarily the case of local investors being unreasonable – these
landlords may simply not have the necessary access
to capital. Should you wish to have a significant portion of your office
improvements financed by a tenant improvement allowance, you may need to focus
on an alternative building set where the overall deal structure will be a
better fit for your specific situation.
Flexibility
is, arguably, the most important factor when considering a long-term lease commitment.
Growth and contraction plans are typically at the forefront of most progressive
organizations’ business planning. At face value, one would think that the
larger the building or complex, the greater the level of scalability, which
offers the required flexibility. But it often soon becomes clear that it is not
always the case.
The
tenant profile within a building will dictate the flexibility of an incoming
tenant’s tenancy. Many prospective tenants assume that a large building will
automatically accommodate their expansion plans due to its size and many moving
parts. Often overlooked are the many pre-negotiated rights that are likely
scattered throughout the building by a number of existing tenants. These rights
can dramatically change the perceived future flexibility available to incoming
tenants. You may have the ability to negotiate terms on future expansion plans
but, more importantly, where do you fit in the tenant lineup?
Comprehensive
due diligence on the existing rights of all tenants within a building is
essential – but often overlooked. Whether overlooked or not fully understood,
the effects can be severe.
Looking
at the tenant representation service on the surface, it is a three-step process
in the order of strategy development, site identification and lease negotiations.
A comprehensive service requires detailed analysis of each of these three
steps. I gain the most amount of satisfaction watching the process unfold and our
clients discover and understand the value of tenant representation – not only the
value-added benefits from a financial standpoint, but the often tough-to-quantify
value of time savings and stress mitigation.
This
value enables our clients to do what they do best: Focus on their core
business.
(Ronan Pigott is a Vice-President in the Vancouver office of Avison Young,
specializing in office leasing. This blog post originally appeared as an
article in the October 2016 edition of Western Investor, a Vancouver-based
commercial real estate newspaper.)
