Commercial Landlords Tips To Attract Office Tenants

Office building owners know they need to be flexible, responsive, and proactive in meeting tenants’ changing needs in the post-pandemic environment.

The COVID-19 pandemic dramatically affected the commercial real estate market, especially the office space sector.

Post-pandemic, it’s been impossible for companies to get their staff back to the office full-time. Many companies have accepted the ‘new normal’ of hybrid working – splitting the week between working in the office and remotely at home.

Organizations now need much less office space.  Should they downsize or quit a commercial premise and go fully remote?  These questions worry landlords, and they need new ways to retain and attract commercial tenants to their offices.

Offices and Office Buildings

Slow adaptation to changing times has left many office and office-building owners exposed. They now struggle to hang onto their assets in 2023.

Sadly, some office landlords have made the tough call to quit, pulling the plug when it’s time to bring their assets up to standard or repurpose them. Cutting their losses can result in selling, which can take too long in a buyer’s market. When there is no other way out, owners of commercial office space hand the keys to lenders who can sell the asset to cover their client’s liability – i.e., recoup the loan principal and selling fees.

A survey by MBA.org confirms the office market is the most volatile of sectors. Therefore, current activity should warn new commercial investors to choose their type of commercial real estate carefully.

When offices are preferred over other commercial property sectors, the investor must choose a location with higher occupancy rates.

Location Is Almost Everything

For offices, location has always played a significant role in attracting tenants.

London

Some locations, like London, show pockets of optimism, with commercial office rents expected to increase by 1.6%. This is close to the overall forecast rent increase for all commercial property by 2026.

New York

New York shows similar optimism. Statista reports that renting and leasing activities in New York are forecast to grow at an annual rate of 1.71% for 2023 – 2024. According to the WSJ, rents increased by 1.6% during 2019-2022.

The good news is rents are rising; however, with inflation up and loan interest rates rising, profits are squeezed more than usual.

Avoid Dropping The Rent

Please don’t drop the rent, as it directly impacts property value. If you have an office building with many tenants, lowering the rent for one tenant affects the value of the building as a whole.

In WSJ, Michael Pan of Carter Jonas says:

If the headline rent is decreasing capital values will fall

You can avoid dropping the rent rate but offer a perk that will win over tenants sitting on the fence.

Offer Perks

Some of the more commonly used perks to secure leases include:

• Rent abatements
• Rent-free period
• Fit-out contribution

Rent Abatement

Rent abatement is a temporary suspension or reduction of rent payments that a landlord grants to a tenant.

In commercial leasing, landlords may grant rent reductions when circumstances beyond a tenant’s control affect their ability to operate in the leased space, such as construction, repairs, or natural disasters.

COVID-19 was considered an event in which landlords granted rent abatement, with national governments insisting on it during lockdowns.

Examples

An example of rent reduction for a commercial tenant might be when a tenant’s store is flooded due to a burst pipe in the building, rendering the space unusable for a certain period. In that scenario, the landlord might agree to reduce or waive the tenant’s rent payments during the repair and cleanup period.

Another example is when the landlord carries out significant renovations in the building, making it difficult or impossible for the tenant to conduct business as usual. In this case, the landlord might agree to reduce or waive the tenant’s rent payments for a specific time to compensate for the inconvenience and lost income.

The specifics of rent reduction will vary depending on the lease agreement terms and the circumstances.

Rent-free time

According to the office property management company, Derwent London, on a 10-year lease, up to 20% of the term can be rent-free.  That equates to an incredible two years (i.e., 24 months rent-free). However, this is London, UK.

In the USA, the rent-free period isn’t as generous.  20% in the UK is just circa 6% (7.5 months) of the lease term. That’s attractive, and I’m sure many residential tenants would love this incentive included in their tenancy agreement.

Fit-out contribution

It’s not uncommon for landlords to contribute to tenant improvement costs.

The amount that landlords contribute to a tenant’s office fit-out can vary widely depending on several factors, such as:

• Location of the property
• Quality and age of the building
• Length of the lease
• Rental market conditions

A landlord may offer a tenant a fit-out allowance, a sum of money the tenant can use to cover fit-out costs. The allowance may be a fixed sum or a percentage of the total fit-out cost.

There is no fixed or usual amount that landlords contribute to a tenant’s office fit-out. Ultimately, a landlord’s contribution depends on the negotiations between them and the tenant.

Tenants must research market conditions thoroughly and be prepared to negotiate to secure the best deal possible.

Standard Upgrades

Upgrading your office building to attract commercial tenants requires standard upgrades that may need extra funds, including:

• Health and safety measures
• Technology upgrades
• Amenities
• Flexible leasing options

Health and safety measures

Building owners are implementing new health and safety protocols to make their properties more attractive to potential tenants. This includes enhanced cleaning and disinfecting procedures, air filtration systems, and touchless technology.

Technology upgrades

The pandemic has highlighted the importance of workplace technology, and many office building owners are upgrading to attract tenants. This includes high-speed internet, intelligent building systems, and video conferencing capabilities.

Don’t forget security. Secure commercial spaces are more attractive to commercial tenants. Cameras, alarms, and panic buttons are features tenants need to keep staff safe in the office, especially outside usual office hours.

Amenities

Building owners are now also focusing on amenities that will make their properties more appealing to tenants.

In a buyer’s market, there are more properties to choose from. Landlords in the know will do whatever they can to stand out and secure long-term tenants. While it will dent your pocket, updating your building with a fitness center, outdoor spaces, bike storage, and food and beverage options can help.

Flexible leasing options

Many office building owners are offering more flexible leasing terms to attract tenants. This includes shorter lease lengths and flexible options such as shared office spaces and co-working arrangements.