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The Fear of Asking for Rent Increases

1st Quarter 2018 Hotline

Market Watch
by Joe A. Hollingsworth, Jr.

For the last decade, landlords have had those calls that will absolutely ruin a landlord’s day from tenants saying that they need a “downward rent adjustment” or “shortened term or to shrink their space”. We have become so accustomed to hearing those requests that we, as an industry, have gotten into a very defensive mindset. Day after day for over a decade, we have been scared to raise per square foot sales price or rent price thus leading to lengthened debt amortization schedules and constant pressure on costs to construct. As developers and landlords, we have re-looked at our cost structures so much in the last 10 years that we have rung every possible penny out of them; and, most of us have had to become very efficient in what we do, or we could not survive.

Finally, the game changed over a year ago, and some in the industry still have a fear of asking for rent increases.  We now have tremendous pricing power, both in sales and leasing. In my estimation, it is likely to be this way for the next decade. However, the biggest hurdle might still be ourselves. The mindset of what “we think” companies may be able to pay based on what they have said for the last decade is definitely a challenge for us to overcome. Finally after years of mediocre returns, it is time to be bold, assertive, and farsighted. Scarcity should be driving landlords’ demands for: 1) longer term leases; 2) stronger protective covenants; 3) parent company guarantees; and, 4) “take it or leave it” on “as is” space – all contributing to a much better outcome on build-to-suits, renewals, or new leases.

One thing that developers can be sure of is that costs are going to continue to go up with: 1) the international building codes forced on the states by the “DC” crowd; 2) the ridiculous EPA energy code that has been adopted in most states; 3) the prolonged drought of new industrial construction limiting capacity with so many suppliers; 4) the developing shortage of skilled labor to build facilities; and, 6) last but certainly not least, rising interest rates. All of these are contributing simultaneously to sizable cost increases to any type of industrial construction. There is simply nowhere to go with these cost increases, except pass them on. Therefore, let’s make “golden hay” while scarcity exists and demand is high.

 

 

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