Who has the Industrial Advantage? Landlord or Tenant?

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By Brian Buschuk
Jones Lang LaSalle

Where has all the free rent gone? A few years ago, Industrial vacancy rates were higher and landlords attempted to beat their competition with free rent for new deals and even renewals.

As the Indianapolis industrial market continues to tighten, the market is turning and landlords are offering less free rent and, in some cases, no free rent — especially on renewals.

Two years ago, landlords offered a month of free rent for each year (for new deals and renewals) in addition to other concessions, such as tenant improvements. Today, it’s more common to see one month of free rent on a three-year term and three months on a five-year term. In many cases, the “free rent” is not completely “free” as the tenant still pays for the operating expenses (i.e., common area maintenance, taxes and insurance) during this period.

When it comes to lease renewals, landlords have drastically cut free rent — unless they believe there is a real chance the tenant could move based purely on economics. Often, this explains why it is beneficial for tenants to take the time to understand the market and current comparable lease information with a broker. Receiving competitive proposals from other landlords is one of the best ways to validate an existing lease and it will certainly create leverage with the incumbent landlord when negotiating.

The industrial vacancy rate has gone from 6.3 in 2010-12 to 6.4 in 2013. With speculative development now under way again for the first time since 2008, landlords will try to lure tenants to their new buildings with free rent. In turn, this may change overall tenant expectations on concessions, especially on renewals as existing landlords attempt to retain their tenants.

For the remainder of 2013, the advantage could definitely shift back to the tenant due to competition brought on by speculative development. If Indianapolis successfully brings new tenants to the market, industrial vacancy rates will remain low and the position of negotiating power may remain with the landlords.

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