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Thursday, March 23, 2017

Quality tenant representation improves office leasing experience

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.)






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