Inside Real CRE Lease Negotiations | Industrial Deals, TI Tricks & Escalation Wars

I sat down with Tom and Mike to pull back the curtain on what’s really moving the South Florida industrial market right now, from tenants shopping renewals a year (or two) out, to commencement timelines stretching from weeks to months, to TI allowances quietly morphing into rent credit piggy banks. 

We get into why landlords are fighting tooth and nail to keep tenants in their seats, why escalation rates above 3% are becoming a real sticking point on bigger deals, and why permitting delays are the silent budget-buster nobody underwrote for. 

You always hear people talk about deals, well, this time, you get to watch the sausage actually get made 🌭 

Like, comment, and share this with someone in CRE who’d find it useful!

These posts and statements are my own and do not represent the positions, strategies, or opinions of CBRE, its clients, or partners.

#cre #commercialrealestate #industrialrealestate #floridarealestate #floridabroker #cretrends #LarryG

Transcript

SPEAKER_00 0:00

Hey guys, Larry Janae here. Thank you so much for joining us. I am here with my co-hosts Tom O'Lachlin and Michael Loretzky. This is the South Florida Industrial Real Estate Podcast, and we're super excited to be talking to you about lease structures and what we're seeing in deals and how deals are getting done, getting into the nitty-gritty details of what's moving this market. So uh Mike, I'll start with you. Like, what do you see in terms of like deal structure for let's call it, you know, the the C and the B minus, you know, older, smaller Bay stuff, and then also some of the mid-Bay um type product. What do you what do you see in how are you seeing deals getting done? How are people dragging these things over the finish line?

SPEAKER_03 0:39

Yeah, I mean, I think this is across the board, across A, B, C, Man on the Moon, it's all uh we're all fighting the same battle here right now. And I I think it's the renewal discussion. I mean, obviously, um, you know, I think we are starting to get more of the national brands start coming to market and the new to market tenants are are starting to really pick up, which is great. But I mean, for the most part, we're talking about moving a guy from A to B. And, you know, the costs, you know, we all talk about costs of our daily lives. I mean, for them to pick up and move in the disruption, like you have to make a compelling case to do it. So, I mean, every deal we're talking about, you know, the occupancy period. So we're having to do, you know, we'll start a lease, like start like we're here in May, we'll start a lease here in Q4 with early access pretty much immediately. Because we got to give these guys time to move without without dealing with the disruption. Right. Ton of that, free rent on top of that. Um, you're talking about TIs, moving allowances. I mean, for these guys to to pick up and move their operation when, you know, obviously you have their current landlord who's doing everything they can, fighting tooth and nail to keep them in their seat, you have to make it compelling. So we're up against that. We're up against short-term renewals, kick the can type offers. So, you know, it feels like unless a tenant is solving for a um, you know, transportation efficiency or uh size, whether they're consolidating, growing, downsizing, whatever it is, it's it's pretty hard to pick someone out of their seat from you know call it from a 20 to 20. Like you really got to make it compelling.

SPEAKER_00 2:10

Right. Definitely. That makes sense. Tom, what are you seeing in terms of like competing with renewals? What's going on there?

SPEAKER_02 2:16

Um, obviously, everybody's out testing the market. You know, they uh whether it's a leverage against your current landlord, whether you plan on moving or not, like everybody's out in the market, and people want to see, you know, if there's anything new, better, all that type of stuff. So I would say um definitely half of our tours are um people out shopping, a renewal. Um but that's part of the market. That's uh you know, that that's the nature of the business, and that's always been part of it. Um, you know, I I would say one of the things that Mike hit on that I'm really starting to negotiate and spend a ton of time on is commencement. Like people are out early and landlords with existing buildings are like, well, what am I gonna do until like you're ready to move into my building? And it's kind of like it it's becoming a long runway and like it's a lot of negotiation, whether it's beneficial occupancy, early start letters, um, you know, and then you like you factor in TIs, like everybody, whether you're on the tenant side or landlord side, is past the old, oh, it'll take you four or five months to move in here. Like everybody's now using like seven or eight months to get TIs done. Yeah, then you factor in like big corporate America or even the regional guys, like it's taking a long time. Oh, we have an we have a lease with them in another market, still doesn't help. Somehow the negotiations on a lease or an amendment are taking like it's gone from weeks to months. Yeah. And it just seems to be every industry, every variety. So, like, you know, on one side you've got it's gonna take us forever to build the place out, it's gonna take us forever to negotiate the lease. And the tenant's like, I need a lot of time, but meanwhile, the wick is burning on the landlord side that like we're delivering buildings, let's go, let's go, let's go. Right. So it we're, you know, we used to just put a commencement date in the lease, and everybody would be like, you know, negotiated a month or two one way or the other. Now it's like huge tranches of time that we're all spending so much time trying to negotiate, obviously, faster for the landlords, longer for the tenants.

SPEAKER_00 4:17

Right. Yeah, it's um people have caught on to how long things are taking, and they're no longer gonna just pay rent while getting set up. Yeah. And they've gotten smart with that, which is part of the reason why they're out a year in advance, a year and a half in advance, sometimes two years in advance, at least testing the market, looking at what's going on, shopping, coiling back up, and then kind of coming back out another six months later so that they're already educated about the market, especially these corporate users with corporate account managers. Yeah, like they're out early, they're doing surveys two years out. I get calls that their renewals aren't up for three years, and they want to know what's happening in the market because the client is asking for an update on pricing.

SPEAKER_03 4:56

Yeah. Well, I mean, you know, we talked about the TI, like a lot of these TIs, and and we we've talked about it on what we're seeing in the market, but they can't operate without them. So it's not like, oh, I I want to put a fan in because it'll be more comfortable for my employees. It's great. It's an aviation company who needs a 20 by 20 door, and they're like, until that's done, I can't operate. Yeah, I can't operate. Or, you know, they're a vitamin guy, and until I have AC, I can't move my product there. So you're on this, like to Tom's point, you're talking that like, hey, it's gonna take me 12 months to do the build out, and Lana's like, well, I want you to start in June. And they're like, Well, I'm not like it can't, it can't. Right. So that's been the big, you know, what Tom said, the given, the give and take. Yeah. Um, but I mean the the TIs has been the the big, you know, that we're seeing in the market that, like I said, the space needs to be perfect for someone to pick up and move.

SPEAKER_00 5:42

Yeah, and as an owner, if you're if you owned an asset for four, five, six, seven years, you've got your first lease renewal coming up, they leave, you've got to re-tenant it. You didn't underwrite in your pro forma seven years ago that you were gonna be down for a year and a half for the next tenant. That's like a budget buster. It's a real problem. And the only thing that I could see that would fix it is if uh GCs and cities and suppliers of the materials that are required cut that timeline in half by by cut that timeline in half or maybe by 75%, which is like unbelievable. That's never gonna happen. So I think this is just the new norm.

SPEAKER_03 6:20

Yeah, I mean the cities has been our big crutch. I mean, you know, GCs aside, they've had their issues on some, you know, getting some product, which I think they've got that big issue anymore. Yeah, right. I think they've fixed, but I mean, the you know, we we've we're going through it now and and not naming the cities individually, but I'll name them. Yeah, to get to get permits for demising walls, I mean, it is taking us months. And so I mean, you sit here and you're talking about moving a wall or doing this and it's taking that long, you're like, no wonder why I I can't get a a larger door approved. It's gonna take a year.

SPEAKER_00 6:51

Yeah, totally off topic, and we won't get into this because it's not related. But if if a city in South Florida were to go like fully automated or like use, you read Jeff Bezos article. I'm telling you, everyone did, but I'm telling you, the first city that does that will be the most success successful city in South Florida in terms of development and and growth and and increases in in income because all the jobs will come there.

SPEAKER_02 7:12

For those that didn't read the article, Jeff Bezos said the permits should take no more than five days with AI. They should. And he's right. But that's another argument. We're not gonna have to do that. All right, fine, we'll get back to lease structure. One of the other things on the leases, Mike mentioned it real quick earlier, but where I'm seeing also a lot of negotiation is escalations. Like, yes, on the smaller deals, call it sub 25,000, 4% is the standard. You're gonna have to come up with some crazy idea to get anybody to move off of that. But I am seeing a lot of movement, especially on the larger deals from tenants and landlords, like that, they are no longer gonna die on the hill for 4%. Right. And like, you know, inflation came down, it's peaking a little bit because of other things right now, macro related. But a lot of these corporate real estate directors are like, we are not agreeing to 4%. And people have to remember when we were nailing 4%, people weren't doing long-term leases. They were doing like quick leases. So, like, I don't care what number you strike at, you hit four percent over a 10-year period, it becomes a big number just from the law of average, you know, the law of growth.

SPEAKER_00 8:21

It's insane.

SPEAKER_02 8:22

So, like a lot now that we're starting to see because of TIs, we have to do seven and ten year deals. A lot of the corporate guys are like, yeah, like we I agree it's not three, but it's also not four.

SPEAKER_00 8:34

Well, let's put it in a little perspective. If you were doing a hundred thousand foot deal eight years ago, you were probably at two, two and a half percent. Yeah, like those those increases were super low a long time ago, eight, ten, twelve years ago. Yeah. So, like to complain about like three or three and a half, I'm not sure. I think it's still a really strong number historically. Obviously, it'd be great if it was higher, but you know, it is what it is.

SPEAKER_03 8:56

Well, and to Tom's point, this is the first time that I've seen, and we're getting calls from the corporate account leads, like, hey, um, what's your rate in OpEx? And by the way, we're not doing a three percent on on the increases. These are coming out. This is before like the survey. I was like, yeah, we'll we'll still show it. Yeah, like, yeah, please, please come out. So, like a lot of these companies, and they're more the nat the nationwide guys who are seeing it hit in other markets first, they're like, Yeah, you guys are out of your mind, you think I'm going four percent on 150,000 square foot DC down in South Florida. Right. But they're telling us early, and they're like, if you want a shot at this, I'm just letting you know this is the number we're gonna we're gonna agree to prior to even touring.

SPEAKER_00 9:32

Right.

SPEAKER_02 9:32

Yeah. Um, so I mean I I'd say commencement escalations are a big factor. We hit on TIs a couple times, so we don't need to hit that again. But um, you know, and then I think um the final thing that I'm seeing is a huge trend is with regards to TIs, not as one is thinking, but the actual TI allowance and what it can be applied to. So like there's a group of landlords that are like, I don't care what you spend it on. You can cut me a check right back and pay your rent out of it. And then there's some that are like, it's not going to anything but rent credit.

SPEAKER_00 10:07

Are the REITs able to do that? Because there used to be rules against that. And like yeah, I don't I don't I don't know Or is it just the funds or is it public attribution?

SPEAKER_02 10:14

Like what the accounting rules are. I know everybody used to have heartburn about like taking you know us paying you with our left hand and you paying it back with your right hand.

SPEAKER_00 10:23

Yeah, we used to not be able to do that.

SPEAKER_02 10:24

It's like the AI thing with the circ circular revenue, like you know, Nvidia's buying, you know, investing in the company that's buying the chips. That's you know, that's like this quarter. But um, we are seeing like discretionary, you know, at first it started slipping from TIs are only allowed to go into building improvements, permanent building improvements. Then we saw the gray area with like racking for collections.

SPEAKER_01 10:49

You can take the fans, you can you know this or that weird thing you're gonna put out there that we have no use for, but go ahead and spend it.

SPEAKER_02 10:54

It looks like a nice thing. Right. And then it went to you can pay us rent. That's pretty awesome. Well, first it went to like 25% of it can go to rent or 50% of it can go to rent credit. Right. And then I saw like you can do whatever you want with it.

SPEAKER_00 11:07

Right.

SPEAKER_02 11:08

And then actually, some some landlords are actually giving the allowance and saying, like, hey, to achieve our rate, just use this as like a piggy bank and rifle it back to us.

SPEAKER_00 11:16

That's fascinating. I haven't heard anyone talking about that, so that's cutting-edge stuff.

SPEAKER_03 11:20

Well, and too, I mean, I think just on the TI point, it's the timelines to use it. Typically, it's always like within the first 12 months you need to use it, and now they're like, using the first like on a 10 or 7 or 10-year term, like first three, like they'll they'll move that. First three years you you can use your TI. So a lot of times the tenant reps will ask for the big chunk of it with plans like, hey, we may we may build out a training room, we may AC this portion of the warehouse. We don't know where like the future is on it. Like you said, on a seven or ten-year term, things are changing every day right now, and they're kind of piggy banking that on a future alteration.

SPEAKER_02 11:53

I think me and Mike are involved in maybe three, four negotiations where like 12 months has come and gone, nobody's fault. City delayed, permit delayed, wrong architect, couldn't find the fire drawings, you know, wrong sprinkler system. Dog ate my homework, who cares? But like we're having to like now, like everybody get in the room, and like no one's fault. Like renegotiate, but like we're gonna like the money's gonna run out here at the end of the month. Like, we need an extension, and of course, the landlords are like, we don't want to go into another budget year, like we you got to spend this money, and the tenants like, yeah, I I want to spend your money, I can't.

SPEAKER_00 12:30

So they're pushing out the timelines you can use the TIs because it historically used to be like six months, and then it was like a year.

SPEAKER_02 12:36

Usually it's like a year from commencement.

SPEAKER_00 12:38

So now it's even longer than that?

SPEAKER_02 12:39

Well, I mean, I'm not saying that it's become a norm, but I'm saying it's become part of the negotiation, it's a conversation. Like, and also you have to think like a lot of times where like you're giving the TI budget to the tenant to spend, the tenant's like, yeah, I'll spend it as soon as I'm done with uh my project in Arkansas, my project in Maryland, I got one in New York, and I got the big one in California. So like as soon as my construction team can like float around the country and get down to South Florida, like I'll do it. And then they arrive in South Florida and been like, oh my god, the permitting thing is worse than we all thought. Like super interesting. We're six months from the start date. Now we're just starting, and it's gonna be six months to permit design. Like, we're never gonna make it.

SPEAKER_00 13:18

Well, we always talk about how like a lot of people don't get to see the sausage getting made. Well, you just saw the sausage getting made. So welcome to the inner sanctum. Um, we hope you enjoyed this podcast and uh getting into the weeds on how deals are getting done, how things are getting creatively structured, and how we continue to move the market and and no matter what the obstacles are. So uh Tom and Mike, thanks so much for that inside look into how you guys are getting all your deals done. It's really, really fascinating. Hope you enjoyed.

SPEAKER_02 13:47

But before we go, Larry, what are you selling here?

SPEAKER_00 13:49

What am I selling?

SPEAKER_02 13:50

Oh, I'm selling uh for everybody who knows Larry, it's up to something. This is not easy to do.

SPEAKER_00 13:56

This only two people, maybe three in the entire planet are gonna care. But just so you know, Terraflow. Mike, tell them about your red light, your red light therapy.

SPEAKER_03 14:04

Yeah, but we will say we we have some great new guests coming on next month that we're very excited about. And uh again, appreciate you guys for joining and hope you enjoyed it.

SPEAKER_00 14:12

Like, comment, subscribe, and share this with someone you know who might find some value in it. Thank you.

unknown 14:17

Thank you.