The successful tenant rep in a landlord's market.

The recent further tightening of real estate markets is good news for the landlord, but represents a serious challenge for the tenant. It is now more critical than ever that a proven, experienced real estate professional be part of the team when a company considers a lease negotiation, an expansion or relocation of offices, the acquisition of a new facility, or the consolidation or sub-lease of excess space.

U.S. office and industrial markets have dramatically changed over the last 18 months, with rental rates increasing', concessions diminishing and availability of space greatly reduced.

Today, the real estate industry is quickly moving into more markets in the U.S. where rents are rising and space is tight, especially for large blocks. Many tenant rep brokers who entered the industry within the last five years encountered soft tenant-controlled markets, where concessions were readily achievable and almost any transaction resulted in a "good deal." In some cases, the tenant representative's only experience in negotiating lease transactions had occurred where the tenants controlled the market and transactions were easily accomplished.

The shift to the landlords' control of many markets has left some brokers ill-equipped to deal with the steadfast positions landlords are taking, the compromises required to structure deals, and the legal expertise required to close deals. Owners are taking strong legal positions in areas such as ADA compliance, indemnification, default provisions, construction management/supervision fees, and assignment and subletting clauses.

What Skill Sets Are Needed Now?

Given these changing market dynamics, what is going to happen to tenant representation? When soft market conditions existed, the number of traditional tenant rep brokers greatly increased. Brokers who concentrated on "getting the deal done" are now ill-prepared to develop a new approach and strategy to accomplish the client's economic goals.

It is unlikely that market knowledge alone will compensate for a lack of strategic planning skills. Tenant rep brokers must continue to develop innovative and creative strategic development skills. Future relationships with clients will be developed and maintained by the ability to determine a tenant's occupancy needs; project costs; analyze alternative solutions (e.g. consolidations, contractions, early re-negotiations, etc.); and the ability to build flexibility into the lease transaction.

Since future results will be obtained only through tenacious and creative negotiations, a different skill set, necessitating that brokers are expert negotiators both on economic and legal issues, is required today. It will be necessary over the next decade to possess: Strong negotiating skills; the ability to grasp and react to market changes quickly; creative and analytical thought processes; the ability to structure complex transactions with proven ability to persuade; expertise in lease negotiations; and analysis skills from both the landlord and tenant perspectives.

Tenant Rep Team

These skills, which can be developed through training, are frequently second nature to project leasing agents who have focused their efforts on leasing properties for owners. These professionals and others should be considered when putting together a tenant rep team. Project leasing agents typically are involved with many types of users and multi-faceted, complex lease negotiations. Also, they are experienced in dealing with the variety of negotiating styles used by brokers, real estate managers, architects and attorneys.

Project Managers

Additionally, brokers with project management experience have a unique perspective of the owner's viewpoint on the methods owners and landlords use to structure leases to achieve desired returns. The owner's emphasis on credit-worthiness, long-term tenancy, rates of return, and key lease points can then be transferred to the tenant side of the transaction.

Leasing Agents

Often, leasing agents participate in a larger number of transactions on an annual basis than tenant rep brokers. As an example, the typical tenant rep brokers may complete eight to 10 transactions per year. Whereas the average leasing agent may handle as many as 50 transactions, including renewals, expansions and lease buy-outs and/or re-negotiations with existing tenants, as well as transactions with new tenants.

As tenant rep brokers are beginning to negotiate in stronger landlord markets, the most valuable asset on their negotiating teams is experience from the landlord or project side that provides a balanced perspective and valuable insight into an owner's negotiating position.

Former Corporate Real Estate Managers

Another excellent addition to a tenant rep negotiating team can be former corporate real estate managers who have experience managing many different types of complex corporate real estate issues. This valuable insight provides clients with an opportunity to work with a team member who has "walked in their shoes" and can often offer innovative solutions based on personal experience.

Tenant rep brokers should begin to look to the various disciplines within the real estate industry to add to its brokerage team, thereby offering the client a wide range of expertise. As real estate transactions become more complex and difficult to finalize, the experience of these industry professionals and their perspectives can assist with closing the transaction and providing the highest quality of service to the client.