Joanna Bartosiewicz, Senior Associate, Office Tenant Representation, Newmark Polska, talks about how to prepare for, and carry out, office lease renegotiations to your best advantage.
Some companies were reluctant to lease new offices in the last two years. The managers of organizations were more than ever before uncertain about the future and what work models they would have to embrace in a year or so. As a result, many pending lease processes were put on hold while tenants whose leases were due to expire chose to stay on in their existing locations. According to real estate advisory firm Newmark Polska, last year’s renewals in Warsaw accounted for 45% of the total office take-up compared to the historical average of around 25–30%.
“Some companies adopt a wait-and-see strategy at times of heightened market uncertainty, putting expansion or relocation decisions on hold, which was the case during the pandemic or the 2008 crisis. As the pandemic eased and business confidence improved, relocations accelerated in the Warsaw office market in the first quarter of this year, with new leases and pre-lets accounting for over 52% of the leasing volume. Earlier this year, the share of renewals in office take-up fell as the market trend reversed. However, due to the current geopolitical situation, we expect decision-making to take longer, with renegotiations likely to become a necessity once again,” says Joanna Bartosiewicz, Senior Associate, Office Tenant Representation, Newmark Polska.
Warsaw currently has one of the lowest office development pipelines in its history – there is less than 260,000 sqm of office space under construction and an undersupply is on the cards from the end of 2023 until possibly the beginning of 2025.
“The volume of space under construction is shrinking by the quarter – especially in the city centre – and is expected to result in more renewals in central locations,” says the expert.
Renegotiations – for whom?
Companies are currently changing their approach to office usage to take account of the need to adopt online and hybrid working.
“Leases are typically renewed for three to five years, which is consistent with usual market practice. However, in the current situation, tenants tend to opt for the shortest term possible to give themselves time to make long-term decisions. By contrast, the minimum term in relocations is five years,” says Joanna Bartosiewicz. “Leases are rarely renegotiated for a year or half a year. Landlords – mostly investment funds – follow their fixed commercialization policies and are unwilling to make far-reaching concessions that go beyond their budgets. During the first year of the pandemic there were a few short-term lease renewals made, but they were made in truly exceptional circumstances at an exceptional time and did not result in a new market standard.”
What is also relevant to tenants is that staying on in their current building does not require any complicated logistics or additional costs. Offices usually just need to be refreshed after five years. There is no need to relocate the whole company, change its address or customize the new space. However, Joanna Bartosiewicz notes that each client is different and must be looked at on a case-by-case basis, because a relocation may also sometimes mean a lower rent or savings thanks to optimized office space in a new location – for example when a tenant decides to move to a much more cost-effective building. Everything will depend on the tenant’s individual situation and requirements.
A two-pronged process
When to begin? According to Newmark Polska advisors, larger organizations should sit down at the negotiation table at least two years before their lease is due to expire, while smaller companies – twelve or eighteen months prior to their expiry. Being pressed for time will always weaken the tenant’s bargaining power, so it makes sense not to procrastinate.
“A two-pronged process comprising renegotiations and an analysis of the market for relocation opportunities works best. This is what we always recommend to our clients. Even if tenants are not ready or don’t want to move, we advise them to consider alternative vacant offices meeting their expectations. Clients rarely say no, they are curious about new opportunities – even if they aren’t going to seize them,” says Joanna Bartosiewicz. “In my work, I have often met tenants who were determined to renegotiate their leases in their current office building, but during the process it dawned on them that they could choose from several exciting, unforeseen options if they decided to move. Two-pronged negotiations also provide the tenant with some kind of security. We don’t always have full insight into a landlord’s plans. The tenant may think that the landlord will renew its lease without any problems, but the landlord may, at the same time, be negotiating the lease of that office space to a much larger organization, which the landlord is not required to disclose in advance. It is worth preparing for various scenarios. A good advisor will support the tenant – will foresee problems and will quickly respond and suggest a recommended solution if something unforeseen occurs,” explains the expert. That is why the advisors of Newmark Polska always go to a client meeting with a full overview of a city’s office market.
Less stress, more good decisions
“Having the full picture of a market, we are able to negotiate the best commercial terms for our clients and secure a favourable lease that will protect the tenant, for instance, against any unforeseen and unreasonable costs of office fit-out or the calculation of service charges. And we always make sure that the lease incorporates provisions safeguarding the client’s interests in the future. We draw on many years of experience of our team of advisors who have already participated in dozens of negotiations. However, we always take a case-by-case approach to each client and each contract, having an eye on each provision and any additional incentives we could negotiate,” concludes Joanna Bartosiewicz.