By Tom Ellis
Businesses thinking of leasing space in Phoenix should have no problem finding a real estate broker to help them select the best site, and negotiate with the landlord on their behalf. But there is one thing the tenant must bring to the table — patience. Brokers who specialize in commercial tenant representation make it clear that site selection and lease negotiation are complex processes that can take several years to bring to fruition.
For Judi Butterworth, a principal at De Rito Partners and a Phoenix broker specializing in retail tenant representation, it all starts with becoming thoroughly knowledgeable about the client’s business. Then she looks at local geography, the freeway system, traffic patterns and changes in demographics. There are many questions her client must answer: What are the client’s goals? Will the client share space with other retailers, who are the ultimate co-tenants? If the client has existing stores here, will some of them relocate?
Retail leasing is more complicated than office and industrial, considering multiple locations and an out-of-state headquarters often are involved, Butterworth says. Client representatives come to town to look around, including the president.
“Part of what you do as a broker is really a process of elimination,” Butterworth says. “You’re given the criteria and you research all of the available space and decide which ones meet the criteria. That way, when you drive around with the client, you know what the alternatives are.”
Once a location is selected, Butterworth negotiates a letter of intent with the landlord. The letter delineates whether her client accepts the space as is or will make improvements; the money the landlord will allot for construction; the number of days allowed for construction; when the lease starts; and when rent payments commence. The final letter typically is approved by a client committee. Then attorneys for the landlord and Butterworth’s client draw up a lease that can be 60 to 80 pages long. After the lease is signed, Butterworth’s job is done.
Retail, office and industrial clients all must determine how much square footage they need, but that’s where the similarities end, according to Butterworth. Brokers representing industrial clients must consider railroad service, dockside service, ceiling height and freeway access. For office tenants, there are questions about the kind of floor plan that will accommodate all employees, where employees and vendors travel from to get to the building, parking requirements and area amenities.
CB Richard Ellis in Phoenix specializes in office tenant representation. Chuck Nixon, a senior vice president there, says he first helps his client select an architect because changes to the existing space usually are needed. Then he rolls out a six-step process that’s the same for small, medium and large tenants — client needs assessment, market evaluation, landlord solicitation, negotiation, implementation and post-project documentation.
The client’s general criteria are gathered during the needs assessment, and a list of potential buildings is narrowed during the market evaluation as the client’s needs are further refined, Nixon says. Once a short list of buildings is drafted, Nixon sends a request for proposal to each landlord. Nixon and the client evaluate the economics of each Request for Proposal (RFP), and the architect evaluates whether the landlord’s proposal is a good fit.
The client accepts one of the RFPs and Nixon negotiates a letter of intent and then a lease. Nixon and the landlord may negotiate through several lease offers as an array of topics are addressed, including tenant rights to expand and reduce the space, tenant improvements as specified by the architect’s design and rights to terminate and renew the lease.
“Typically, the client is involved (in negotiations) as much as they want to be,” Nixon says.“Some want to be involved in just key decisions. Some want to be involved in all points of discussion.”
Implementation includes construction and final lease documentation that covers such areas as lease term, rent, additional costs (i.e. property taxes and/or maintenance), security deposit, subleasing and dispute resolution. In post-project documentation, Nixon makes sure the client’s move into the space is coordinated and that the client is happy.
Current market conditions offer more opportunities than challenges for tenants, Butterworth and Nixon say. The main challenge is selecting the right building. Butterworth and Nixon make sure they work the opportunities into lease negotiations.
The construction frenzy over the past few years has resulted in an ample supply of retail and office space, and Butterworth and Nixon say vacancy rates have climbed. Consequently, landlords are aggressively pursuing tenants, and brokers can negotiate lower rents or no rent for specific periods of time. Landlords are offering more concessions and are flexible on tenant improvements and parking requirements.
“Clearly, it is a tenant-friendly environment and will be so for the foreseeable future,” Nixon says. “Which is good. One thing you don’t want as a tenant is limited options.”