How a Tight Labor Market Affects Commercial Real Estate
Specializes in providing actionable insights into the commercial real estate space for investors, brokers, lessors, and lessees. He covers quarterly market data reports, investment strategies, how-to guides, and top-down perspectives on market movements.
The post-pandemic era lines up with the old Dickens line: it was the best of times, it was the worst of times.
Truly, the silver lining here is that people are beginning to get back to normal, which is always a positive sign in the commercial real estate world. Employees are going back to work; a necessary thing for office building tenants for sure.
However, the flip side is also present: the labor market is tight, the supply chain is crunched, and tenants have their pick of buildings.
For the property owner looking to attract the right tenant, there will be much more wheeling and dealing involved than ever before.
With good reason: pandemic-level vacancies are still hanging on, despite recovery efforts across the board. Vacancies are well known to be as toxic to a landlord as chocolate to a puppy: a few bites might be manageable, but too many vacancies are downright fatal to the bottom line.
Addition Through Negotiation: Looking for Win-Win Agreements
What does it really mean to add during the negotiation process? A few things:
- Looking at true win-win lease agreements, versus agreements that weigh things heavily in the landlord’s favor.
- Considering a tenant improvement allowance to give tenants the power to rethink the space while updating the important parts.
- Keeping what matters (long term agreements if possible) and letting go of lighter issues (what the paint colors look like) .
- Thinking about bringing properties under the right system versus having agreements that look drastically different between tenants.
Listening to what the tenant is looking for during the negotiation process will go a long way to making it clear that you have the right building for their needs, as well as the right service level in mind.
Customer service isn’t just for business-to-consumer transactions, after all. Business-to-business transactions also deserve world-class customer service and care.
Addressing Construction Delays for Commercial Improvements
Ask just about anyone around the greater CRE sphere, and they’ll mention delays. Delays with suppliers, delays with contractors, and delays even with general laborers. People are busy, and the time they have for new projects is now highly competitive.
Costs are going up, which have to be added to the bottom line for proper accounting. Markets fluctuate, but no one predicted something as large as the pandemic still having such a lingering effect.
Concessions Lead to Contracts
One of the hardest things to realize is that in a tight labor market, concessions lead to contracts. Making concessions large and small is necessary to keep the flow of business going.
- Need to get things done faster? Putting in orders with net 30 terms instead of net 90 terms can lead to better terms of how other businesses prioritize your orders
- Do you have an idea of your dream tenant? Sometimes the right tenant is far from the dream tenant.
- Breaking a renovation project down across multiple companies to get it done can often move timelines forward, but it increases complexity. Try to keep it simple.
Figuring out where the flexibilities live within every deal leads to smoother deals and “constellation” deals that arise after one successful project is completed.
Using your greater commercial real estate network wisely comes in handy here.
Making a Play for Tenants in a Crowded Space
Right now, everyone is looking for new tenants. It’s important to narrow down not just who the right tenant would be, but looking back at the acquisition system in place to get tenants interested in the first place.
One characteristic that business owners look for in any transaction isn’t just price but how easy it is to complete the transaction. Being difficult doesn’t lead to getting the deal closed. It goes back to compromise, looking to build a situation that benefits all parties involved.
Being Realistic About a Commercial Property
A tight labor market, coupled with a glut of buildings for rent joins forces to create a scenario where property owners are going to have to be realistic about their property. They will most likely not attract the exact tenant they want.
Being realistic about a property doesn’t mean highlighting everything negative and hoping for the best.
The building still has value, but it has to be viewed under the right lens. Trying to cover up a building’s imperfections within a lot of glossy brochure pages just isn’t the right way to handle this market.
The Numbers Still Steer the Ship
A guide about compromise isn’t earth shattering, but common sense often leaves the coop quickly in uncertain times. The numbers still steer the ship, which means that the tenant improvement allowance doesn’t have to be so large that it eats up any profit to be had from the rental building.
It’s time to get serious about the numbers. While some tenants are looking for the absolutely cheapest place they can get, others are looking for a blend of features, quality, and flexibility.
As mentioned before, getting deeper into tenant wants and objectives helps build an agreement that’s much more satisfying.
Labor market aside, it’s about giving people the right commercial property where they can thrive. For example, if you have an office building, you want to attract tenants who are implementing return-to-office policies.
A Full Building Fulfills Its Purpose
Commercial real estate is about making sure that buildings are living up to their potential. A vacant building can’t live up to its potential because no one is in the building.
Tenants that have a high number of remote workers may look at leaving their leases early or opting not to renew.
Giving tenants a reason to work with you means that the building you have fulfills its purpose. It earns its keep within your commercial portfolio of properties, and it also helps the tenant meet their own business objectives.
The commercial real estate world is a place where multiple parties can profit at the same time, so it’s a good time to revisit this principle by working through negotiations, making properties look appealing, and building deals that make sense for everyone.
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