Office tenants are looking for concessions from landlords, beyond deals on rent: survey

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Office tenants are already getting great deals on rent as vacancy rates remain high, but a new survey finds many want much more from their landlords.

More smart building features, flexible lease terms and decarbonization strategies are among tenants’ key demands, according to a report from Deloitte published on Tuesday. Landlords, the survey found, are making little progress toward meeting them.

The survey polled top executives from 100 Canadian commercial real estate owners and tenant companies with a minimum of $50-million in annual revenue. Marco Macagnano, digital real estate leader at Deloitte’s real estate advisory business, said the goal was to determine whether landlords and tenants shared similar priorities.

“We wanted to reconcile the differences and see if they are all operating from the same point of view; whether landlords and occupiers are connected and prioritizing the same things,” Mr. Macagnano said in an interview. “We found there are actually some gaps.”

Among the widest gaps were issues related to reducing the carbon footprint of office buildings. Only 30 per cent of landlords said they had a road map to achieve net-zero emissions by 2050 and even fewer – 26 per cent – said they had any decarbonization strategies or emission reduction goals for 2030.

Yet tenants identified sustainability – or lack thereof – as a deal-breaking issue. Most tenants – 58 per cent – said they would look for alternative leases if their existing landlord failed to meet net-zero goals, and nearly half – 48 per cent – said they would look for early lease termination in that scenario.

Landlords who fail to decarbonize also face the prospect of having to settle for lower rents, the survey found, with 42 per cent of tenants saying they would conduct an “aggressive lease negotiation” for a lower rate.

“Real estate owners need to place more importance on ESG factors, at both the leadership level and the project level,” Deloitte said in a report accompanying the survey results. “As tenants get more disciplined about reducing their environmental impact, they’ll expect the same from their landlords.”

Those results contrast sharply with what John Duda, president of real estate management services at Colliers Canada, has been hearing from his own tenants.

“I have about 11,000 tenants in every primary and secondary market across the country,” Mr. Duda said in an interview. “We did our own recent survey and only 29 per cent of tenants even cared about ESG – that says something. To say, ‘I want something’ versus saying ‘I am willing to pay for something’ are two very different things.

“We have been doing tenant surveys for decades and what is consistent every year when looking at priorities for tenants, number one every single year without fail is cost, always,” Mr. Duda said.

With Canadian office vacancy rates at multidecade highs, tenant companies have already managed to negotiate some of the best deals in years with their landlords. While overall rent figures have stayed high, landlords have been increasingly offering concessions to prospective tenants.

“It is a tenants’ market right now,” Mr. Duda said. “We aren’t seeing face rates decline in general, but tenant inducements have increased. A month or so of free rent, outfitting the space, doing more landlord work, that has increased for sure and it is not unusual behaviour in this kind of market.”

If the economy falls into recession, the Deloitte survey found tenants will want even more concessions. Fifty-two per cent of tenants said they would ask for more rental concessions in case of recession and 48 per cent said they would demand more flexible lease terms.

The only time in Mr. Duda’s career that such a thing commonly occurred, he said, was during the height of the COVID-19 pandemic.

“It is not common, and I would be shocked if it became common,” he said, “because at the end of the day, landlords have bills to pay; they have mortgages on those assets.”