Negotiation Tactic: Create Leverage
In warehouse lease negotiations, the key is to identify your leverage before you even start, says procurement expert David Hovell. If you don't have any, you must create it by deeply understanding what the other side values beyond just the base rent. This echoes other advice stressing the power of offering flexibility on termination or expansion rights to win deals without conceding on price.
The market dynamics in Southern California's industrial sector are creating new openings for savvy tenant negotiations. In the Inland Empire, the industrial vacancy rate hit 7.2% in the second quarter of 2024, a significant jump of 330 basis points year-over-year. This rise in vacancy is happening as 14.2 million square feet of new construction has been completed in the first half of the year, while net absorption was only around 3.2 million square feet. This supply and demand imbalance is causing a noticeable drop in rent growth. The average asking rent in the Inland Empire fell by 6.6% from the previous year. Landlords are now more frequently offering concessions, such as several months of free rent, to secure deals. For example, Dollar Tree secured seven months of free rent on a 3.5-year lease for a 212,000 square-foot building in San Bernardino. In Los Angeles County, the industrial vacancy rate also climbed to 5.3% in the second quarter of 2024, a 160-basis-point increase from the previous year. The market saw negative net absorption of 8.3 million square feet in the first half of the year, while 3.3 million square feet of new construction was completed. This has led to a 15.6% drop in the average asking rent compared to the prior year. A key piece of leverage for tenants is the surge in available sublease space. The Inland Empire has a record-high 13.1 million square feet of vacant sublease space, a 214% increase from the second quarter of 2023. This abundance of discounted space is putting downward pressure on direct lease rates. For tenants, this market shift underscores the importance of starting the negotiation process early, sometimes as much as 12 to 18 months in advance of a lease expiration. This extended timeline allows for thorough market research and creates a competitive environment among landlords. Beyond base rent, there is now greater opportunity to negotiate for other valuable concessions. Tenant Improvement (TI) allowances, which can range from $10 to $100 per square foot, are a significant point of negotiation. Other potential concessions include early termination options, expansion rights, and caps on operating expense increases. Understanding the specific needs of different tenant types is also crucial. E-commerce and 3PL companies, for instance, often prioritize flexibility, scalability, and proximity to major ports. In fact, about 75% of warehouse demand in Southern California serves local and regional distribution, with the remaining 25% tied to global trade. Despite the current softening, the long-term outlook for the Southern California industrial market remains strong, with some experts believing that vacancy rates may have peaked. A dwindling construction pipeline is expected to lead to more favorable conditions for landlords in 2025. This makes the current window a critical time for tenants to secure favorable lease terms.
