Dive Brief:

• Even as the growth of remote and hybrid work helped push the U.S. office vacancy rate to a 30-year high, most (74%) of small to medium-sized businesses have seen the monthly payments they make on their main leased commercial real estate properties spike over the last year, according to a July survey of 500 managers at small to medium-sized companies by Capterra, an Arlington, Virginia-based provider of software and services. Most (85%) of the respondents held office leases and 63% had retail spaces under contract.

• Landlords — particularly those struggling with office buildings that are often more than 20% vacant — are in a “precarious financial position” as many struggle to avoid giving the keys to their properties back to lenders, in part by holding the line or raising rents to offset inflation to pass their own rising costs on to tenants, the survey states. Nearly half (49%) of firms are preparing for CRE prices to rise even further next year and are reducing their leased space and consolidating properties in preparation, the survey found.

• “This is a unique moment in time… Rents, leases, and consumer prices across the board tend to be very ‘sticky’ and resistant to deflation,” Max Lillard, a senior analyst at Capterra wrote in an emailed response to questions from CFO Dive. “That said, the decreased demand from commercial tenants will force the hand of the landlords if and when their tenants attempt to negotiate their leases.”

Dive Insight:

So far the turmoil in the office market has shown up more clearly in vacancies — the U.S. office vacancy rate rose to a decades high of 18.2% in the second quarter and is expected to climb higher — than in rent levels, CFO Dive previously reported. Overall average direct asking office rents in the top 10 largest office markets dropped 0.02% to $38.13 per square foot from the first quarter, but were still 1.2 percentage points higher than the year-earlier period, according to real estate services firm CBRE. 

Still, the CRE market is ushering in new cost-saving opportunities for financial executives and CFOs willing to negotiate for them, the survey found. Real estate is a significant expense: one-fifth of the businesses surveyed reported spending 31% to 40% of their overall budgets on leases, and just under half (38%) of the businesses spent $250,000 to $500,000 on leasing costs last year.

“It’s the perfect time for CFOs to negotiate leasing terms,” Lillard wrote in his email, noting that lease restructuring discussions with a landlord is a good place to begin even though there isn’t a hard-and-fast rule every business can follow to trim costs. “Many of our respondents capitalized on renegotiations... in a variety of ways. Some had their security deposit waived, while others added conditions into their lease that would allow them to make rent adjustments in the future.”

What can be negotiated will depend in part on the type of lease that the company has. Most companies have full-service leases in which the tenant’s single monthly rental payment includes all expenses. There are also net leases, in which the tenant pays a portion of the taxes, insurance fees and maintenance costs, and modified gross leases where the tenant works with the landlord to pay ongoing expenses, according to the survey. 

Unlike temporary landlord assistance like rent forgiveness, changing the lease term or who is responsible for various expenses is a long-term cost-saving option for tenants, the survey found. For example, a landlord may be willing to offer a lower rent if the tenant agrees to extend the time it will stay in the property. Either way, once a tenant is at the negotiating table they are feeling growing power these days, the survey states. 

“The worst possible scenario for landlords is vacant space — and finding (or retaining) credit-worthy tenants for long-term leases is becoming harder than ever,” according to the research.