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  • Member Post: Should Office and Industrial Tenants Believe Online Quoted Rental Rates?

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    Should Office and Industrial Tenants Believe Online Quoted Rental Rates?
    The internet is a powerful tool.  The amount of information available is staggering and very convenient.  Many business owners and executives use the internet when checking prices, including when their lease is nearing expiration or when looking at new space options.  And why not?  The internet is full of free information.  But, notice that the word “free” is part of the last sentence.  So, how accurate is the information online versus the real market conditions?  Let's take a look at some of the motivating factors behind landlord's quoted online rental rates. 

    Like anything free, one must consider the source.  In the case of commercial real estate, the source of a building’s quoted rental rates online is the property owner or the leasing agent in charge of leasing that commercial building for the owner.  So, it’s not the same as going to Expedia.com to price out airfare! In commercial real estate, quoted online rental rates are used for different purposes - all of which are meant to make more money for the landlord from the tenants.     

    So, why do landlords and leasing agents have their building's quoted rental rate information online at all if those numbers don't reflect their real market?  Here are a couple of reasons why they do it:
    • The number one reason landlords quote their rates online is because they want their existing tenants to go online and look at those rates.  The existing tenant “assumes” that the online rate is the rate generally being charged to every tenant.  Thus, if an existing tenant receives a lease renewal or expansion proposal that matches or is slightly below that published online rate, they naturally assume the landlord is being fair with them and they are getting a decent deal.  Not true.  In fact, landlords often pump up their online rates to be above market when they have very little space left to lease.  This helps the landlord establish a "perceived" higher rent level in the minds of their tenants.  As such, the discounted rent offered is actually not a discount at all as compared to the real market conditions.  This is a very powerful and profitable landlord strategy.
    • Building leasing agents want businesses interested in space to contact them directly versus working through a tenant representative agent.  The quoted online rates provide the illusion of what the market price is, but that is sometimes enough to convince a business that the space is priced fairly.  So, the business becomes comfortable that they know enough about the market to do the lease themselves.  And of course, the "nice landlord agent" is all too willing to "help" them through the leasing process, which provides businesses an additional level of comfort that they are in good hands.  The problem is, the building agent only represents the interests of the landlord.  So, the tenant is not in good hands - they are in the wrong hands!                           
    Landlords make most of their money on lease renewals of their existing tenants.  The reason they do is because the tenants often negotiate those renewals without the guidance of a tenant representative and the tenant ends up paying much higher rental rates than they should.  The agent working for the landlord will likely invite their existing tenants to “go ahead – look online at our quoted rates” as some type of truth verification that the lease renewal terms on the table are actually reasonable.  This is a trap and a very effective one.  Many tenants move down the path and sign their lease renewal after this step of the negotiation process and feel quite good about their decision, even though the online information provided was published by their adversary and not reflective of market conditions.         
    We can all agree that the internet is a tremendous resource that does provide some transparency in pricing for consumers.  But in the commercial real estate business, the quoted rental rate information published online is used by landlords for different purposes beyond simply communicating what they are charging for space.  Business owners and managers need to be wary and mindful that the online information they are seeing may not reflect the actual market conditions.  It can be an illusion of transparency. 

    About the author:
    Wayne Teig is the President and founder of ITRA GLOBAL - CREST Commercial Real Estate Strategies.  The firm represents space users in real estate lease negotiations, property purchases, property sales, site selection, and strategic planning.  The company is located in Minneapolis, MN.

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