How to Negotiate Like an Industry Expert
3 CRE leaders explain how to negotiate deals your clients will love
Successful negotiations are key to securing favorable deals for yourself, your firm, and your clients.
And with a pandemic and an economic downturn changing the landscape of commercial real estate, negotiation skills are taking on even greater importance.
In a recent webinar, three CRE leaders covered what it takes to negotiate deals you can be proud of. The panelists consisted of:
- Mark Duclos, President of SIOR, President and Co-Founder of Sentry Commercial
- Jay Olshonsky, President and CEO of NAI
- Vijay Mehra, Founder and CEO of Rethink
They discussed five questions brokers and firm leaders must answer to successfully negotiate jaw-dropping deals.
Here’s what they had to say:
1. What is the deal worth?
The first step in a successful negotiation is understanding what the deal is worth.
But, as Mark Duclos pointed out, what a deal is worth is based on viewpoint, transaction type, and asset class.
“I think the biggest difference is whether you’re dealing with the investment side or the occupier side,” he explained. “On the occupier side, clients determine the value of the deal by asking: ‘Do I really need the property?’ and ‘Has that changed since the pandemic hit?’”
Jay Olshonsky noted that, in some negotiations, you also need to factor in the financial viability of those you’re negotiating with to determine the value of an agreement.
“If you have tenants asking for rent relief at a retail property, for example, you’re going to have to make a lot of individual decisions,” he said. “If the company is already dead, giving them relief might not actually help them. And you can’t offer one-size-fits-all relief because if you do, everyone will take it, whether they need it or not.”
He went on to explain that it’s just as important to understand the financial position on your side of the table.
“If you’re the occupier, and you’re going to make it through the downturn, your point of negotiation might be finding a blend-and-extend agreement where the owner gets something they want from a long-term point of view, and you get a little relief to fill a gap in cash flow,” Jay said.
Vijay Mehra, whose 15 years of CRE experience extends to present-day development and adaptive reuse projects, noted that the cost of not getting a deal done is also a factor.
“Let’s look at one of the deals we have here in Austin, for example,” he said. “We’ve got a 12,000 square foot office space, and we’re faced with a decision of whether to continue negotiating with the coworking company occupying the space or finding another potential occupier. As we’re going through this, we’re looking at the potential downtime of trying to get someone else in this space. That gives the current tenant a bit more negotiating power.”
2. What’s your walkaway point?
Knowing when to walk away from a deal is key. If you’re not willing to lose a deal, you’ll struggle to push for more favorable terms.
So, how do you determine the right time to walk away?
According to Jay, many firms develop a formula.
“A lot of people have a process in place. They’ll say, ‘Okay. If we’re 10% off and it’s a solid asset, I’m going to buy. And I’m going to keep buying as it gets to 20% off and 30% off,’” he explained. “Having a defined decision-making process on how far you will or will not go can determine your walkaway number.
“One gentleman I’ve known for a long time would sell anything once he achieved 50% more within a 12-month period,” Jay continued. “He didn’t care about the taxes. He didn’t care about 1031s. He didn’t care about anything else.”
Mark added that it’s critical to understand your client’s perspective and needs.
“What’s driving the transaction?” he asked. “Looking at the occupier side, some of our clients need the space. There’s a tight market, and their choices for buildings are limited. So, no matter what kind of data we give them, are they willing to pay a premium because they need a facility? They need to operate a company. That’s different from an investor.”
Mark then explained that the relationships you form over your career can help you better understand what matters most to those you’re negotiating with.
“You know the personalities going in,” he said. “You know their hot-button issues.”
According to Vijay, the key to determining an effective walkaway point is letting logic, rather than emotion, guide your decision-making.
“This is something I had to learn when I got into real estate,” he said. “Never fall in love with a deal. Don’t let the emotion drive you. The second you let your emotion tie into that deal, you’re going to justify any price point possible.”
To prevent that issue, Vijay evaluates multiple scenarios prior to the start of a negotiation to determine what terms he does and does not view as acceptable.
“I’ll create A, B, and C scenarios,” he explained. “The A scenario is my best case, and the C scenario is my worst case. I set those parameters for myself so I can say, ‘Okay. In this case, I’ll absolutely walk away, and in this case, let’s keep pushing forward.’”
3. What are your alternative options?
To have a realistic walkaway point, you have to have other options.
In Vijay’s words, having other options is important because it “keeps you from feeling like you’re in a position where you have to make a decision that’s not favorable.”
And according to Mark, uncovering alternatives is one of the best ways brokers can provide value for their clients during negotiations.
“Clients need someone who can give them the intelligence on the marketplace that’s going to allow them to negotiate from a position of strength,” he said.
“When I’ve done tenant assignments, I’ve always said, ‘I’m going to make you look at more than two properties, and you’re going to negotiate on more than two properties even though you don’t want to move into them,” he explained. “Because things happen. Deals evaporate.”
But Mark noted that finding alternatives isn’t always possible — in which case, you need to get creative.
“Sometimes, the intel you’re able to provide is that you can have another building built in nine months … but guess what? Your client needs that building today. That’s going to drive the price up,” he said. “So, what do you do there? You’ve got to play the game. You’ve got to play poker.
“And maybe you look at other terms,” he added. “Maybe it’s not just the rate you’re negotiating. And of course, post-pandemic, we know there are other things that now need to be included in the lease. So, maybe you’re negotiating harder on terms because the rate is the rate.”
4. What’s your game plan?
Before a negotiation, all possible challenges should be considered, evaluated, and have a set solution to overcome them.
“What I always do is I’ll try to think of every objection I may get along the way,” Vijay said. “I’ll write them down, and I’ll have a rebuttal ready for each one.”
Vijay went on to note that even when you prepare ahead of time, you’ll still likely get questions you didn’t expect.
“If you’re asked something you don’t have an answer to, don’t feel like you have to respond immediately,” he suggested. “Take some time to really understand, ‘Okay. Well, what does this mean? How are we going to come back and challenge this?’ Then, make sure you’re using data and facts to support every rebuttal.”
Jay advised seeking outside expertise to help you understand what’s likely to be most important to the party you’re negotiating with.
“I one time had an owner that wanted to attract a law firm to a very large empty building in a CBD,” he recalled. “I said, ‘Why don’t we engage a law firm tenant broker who is not conflicted on the deal? Because we really need to understand what a law firm wants, and no one is better equipped to advise us than someone that represents law firms.’”
Jay added that it’s also critical to educate your clients on common CRE issues that fall outside their expertise.
“I was in negotiations last year over tenant improvements, and the tenant I was representing said to me, ‘I don’t understand what a construction management fee is,’” he explained. “So, oftentimes, you have to start with educating whoever you represent.”
For Mark, the most important part of preparing for negotiations is setting clear expectations and goals with your clients.
“You want to know what your clients’ must-haves are and what their want-to-haves are,” he said. “If you know what the must-haves are, you know you may need to fall on the sword to get them, and you’ll know when to give up on the want-to-haves.”
5. Do you have the data to back up your position?
Data is a critical part of any negotiation.
Having data to back up your position allows you to present your arguments in a logical format that removes emotional objections.
“If you look across the table and somebody says, ‘You know what? We really want that extra 50 cent bump’ or ‘We want that extra 3% bump,’ having data in front of you allows you to say, ‘That’s not what the market shows. ABC company just did a deal across the street at X, and by the way, they had X bumps,’” Mark said.
He then explained that while many brokers and CRE leaders understand the need for data, they often get hung up on the cost of obtaining it.
“Everybody can talk about the cost of data, but I talk about the cost of not having data,” Mark said. “We have some really good brokers out there who are only doing half of their job. They understand the market. They understand the lay of the land, the personalities, what owners will do deals, and what owners won’t. But they also need the data that can prove where the market is from a metric standpoint.”
To ensure the team at Sentry Commercial has access to the data they need to do their jobs effectively, Mark invested in a tech stack that includes:
- Rethink — a CRM purpose-built for commercial real estate
- CommissionTrac — a CRE back-office solution
- Buildout — a CRE-specific marketing automation platfom
- Microsoft 365 — a suite of business collaboration tools
- And more
“What jumps off the page for us from an informational standpoint is our CRM,” Mark said. “It helps us understand who our clients are, who within our company is working with those clients, what level we are working with them at, how they are classified, and more.”
He went on to note that the integration between Rethink’s CRM and his marketing automation platform increases the tech stack’s value.
“Having Rethink and Buildout talk to each other and drive the marketing for our properties is huge,” Mark said.
Jay agreed that using technology to more effectively leverage data is critical … but often overlooked.
“80% of brokers need to embrace technology more than they’ve embraced it historically,” he explained. “10% are off the charts and buy whatever data, whatever technology they need, and the next 10% are trying to be just like the other 10%. But we still see a bunch of brokers who are hesitant to engage with the new way of doing business.”
And that gives those who do invest in technology a major leg up on their competition.
“If you look at the 10% that’s controlling 90% of the business, if you ask them what sort of technology they’re using, they say, ‘Anything we need,’” Jay pointed out. “In that way, they’re separating themselves. So, I really encourage you, if you aren’t using modern tools, you need to start using them.”
Vijay noted that with the economic uncertainty that’s followed the pandemic, investing in technology has become more important than ever.
“It was so easy previously. Pre-March, deals were just falling in your lap,” he said. “You didn’t really have to leverage technology, but that’s changing very quickly.”
“If there’s anything the pandemic has taught us, it’s that data and technology matter,” he said. “I’d love to see our industry using those tools at a high level all the way through. The companies that do will accelerate. And if you’re not using data and technology, you’re just so far behind. It’s not even close.”