A recession bright spot: Tenants gain leverage with landlords

While small businesses are still struggling in this weak economy, many are catching a break when it comes to negotiating with landlords.

The weakness in the commercial real estate market comes in part from high vacancy rates in many parts of the country. And many landlords are increasingly willing to cut a deal with renters so they can keep their buildings occupied.

“The balance of power in negotiating a lease or renegotiating a lease in some areas is now with the tenant,” said Janet Portman, an attorney and co-author of “Negotiate the Best Lease for Your Business.” “If the market is awash with space, then you can assume the competition will be tight for rents and you’re going to have some real clout.”

Even companies whose leases aren’t up for renewal can get better terms, Portman said. She noted that in many states, a commercial tenant breaking a lease ends up responsible only for the months that a property is vacant. So a business that breaks its lease and moves to a much cheaper space can end up saving money. That’s likely to make many landlords willing to lower rents or agree to other terms.

Portman also said owners need to be careful about properties where landlords may be too eager to lower their standards to get tenants. A building that is filled with struggling companies that ultimately can’t pay their rent is going to turn into a ghost town and be a less desirable location of the remaining tenants.

Portman also warned that small businesses that are struggling probably won’t be able to cut a better deal.

“Even a landlord who’s desperate to rent isn’t going to take a chance on a tenant who’s got a bad track record,” she said.

Owners who are searching for space learn to develop a strategy, especially when they’re dealing with landlords who still think they can get the rents they want.

Matthew Higbee’s law firm, Higbee &Associates, is renting space while it waits for sales prices to stabilize in Orange County, Calif.

“We looked at properties, and at the end of the day, we decided we might save money by renting, and buying commercial real estate in two years, when prices are lower,” he said.

Higbee said landlords in the area didn’t seem very willing to negotiate, and many he dealt with were trying to hold out for higher rents. His firm ended up renting 3,700 square feet for $1.10 a square foot after turning down demands for as high as $1.95.

“They hurt themselves by not taking less,” he said. “Now they’re getting nothing.”

Higbee’s advice to other small business owners is to hang in as long as they can before agreeing to lease terms. “The longer we were able to make it in our space, the better a deal we were able to get,” he said.

Business owners also find that being creative, and looking for a different kind of space, can save them a lot of money.

Beef O’Brady’s, a chain of family restaurants, has built the majority of its stores from the ground up in grocery store shopping centers. But company president Nick Vojnovic said the difficulty in getting loans has made it almost impossible to continue that strategy.

“We had to decide how to go forward,” Vojnovic said. The answer was to look for spots that weren’t traditional Beef O’Brady’s locales.

Over the past year, Beef O’Brady’s company-owned and franchised restaurants have opened in existing buildings including hotels, a college, even a country club. The company has also taken over restaurants that had closed.

Vojnovic said landlords and hotel operators have been willing to rent to Beef O’Brady’s not just because they had empty or money-losing space, but because the eateries bring in more customer traffic.

Vojnovic said the chain has opened just under 30 restaurants this year, with only three or four built under the company’s old model. Without the ability to make these deals, he said the chain would not have been able to expand as much.

“It dramatically lowers the cost of the franchise,” he said.

Joyce Rosenberg writes about small business for the Associated Press.