Are you ready to rumble? To the pounding strains of “Eye of the Tiger” from “Rocky III,” this poignant question was asked of a packed house at the 2010 CoreNet Global Asia Summit in Singapore.
So why the need for a “fight”?
The contention of this session was to explore whether gains can be made by acknowledging some of the inherent differences in how landlords and tenants look at the same hot topics in our industry, and instead of having a polite but perhaps low-result discussion, see what might happen if we took it to the next level in a steamy debate format.
So what happened?
Meng Chew Ching of NOKIA and Aylwin Tan of Ascendas began grappling in Round 1 over an important topic for everyone the environment. The attack of the tenants was: The environment is important, landlords have a duty to provide contemporary buildings with the latest applicable technology, and building a property that meets modern sustainability criteria should be part of that remit. They also agreed that tenants will pay market rent for such properties but do not necessarily want to pay extra. The landlords agreed buildings should adapt to all applicable codes and commercial trends, however, because of the length of the owner’s investment in the property, it is ultimately up to them to decide what the best overall level of investment and technology is for their asset in the longer term since tenants’ sustainability needs can be inconsistent in certain areas.
The Punch Line: Most tenants now have a desire for sustainability features in the properties they occupy, but most don’t want to pay extra or at least feel they are paying extra as a result.
The Result: After a closely fought round, the landlord’s side was voted (by audience applause) winner of Round 1.
Round 2: Lease Flexibility Wants Versus Needs
The tenant side (this time led by Adam Newgreen of Barclays Capital) started aggressively, with the contention that fixed rental terms during the lease and some flexibility in the ability to expand and contract are important to tenants in managing their businesses. Landlords in Asia frequently do not provide that at least not in the longer term. The tenant side noted that it might commit longer to the relationship with a given landlord if there was more rental certainty, as well as accommodation for expansion and contraction. Further, the tenant side complained of the high rental deposit requirements that exist in many Asia markets, which ties up a lot of working capital.
Responding for the landlords,Tan Jee-Long of China World Trade Center noted that the restrictions of banks in their financing terms, supply chain issues and rising construction costs are often the culprits that require landlords to seek higher rents and be less flexible regarding lease terms than they might otherwise be, over and above the general space demand/supply dynamic. Both sides agreed that a lack of communication can result in a gap between desired and resultant outcomes, resulting in miscommunication and deterioration of the relationship.
The Punch Line: The tenants asked whether the Asian landlord community at large is generally interested in building long-term relationships with tenants or somewhat indifferent, relying on demand in the market at large to look after them in the longer term.
The Result: The tenant’s side was judged the winner of Round 2.
Round 3: Property Agents Who Are They Representing?
This round was a chance for the property agents to square off on both sides of the debate. Nigel Smith of CB Richard Ellis took up the case for the landlords, asserting that some property agents are making matters worse for everyone by not being up front in representation issues. Some agents attempt to get the best of both worlds by trying to make both landlords and tenants think they are working for them. Smith noted this behavior is particularly bad news for landlords, since they are the ones who most often pay the fees and are at least owed better treatment as a result. He also expressed concern that some agents do not provide accurate information for their tenant clients and instead relate misinformation. The landlord may feel he/she would be better served by talking to the tenant directly not through a tenant representation advisor.
George McKay of Colliers International responded for the tenants, with acknowledgement that all major service providers have an obligation to train their staff appropriately and at least in larger markets have well-defined landlord and tenant rep teams that are separately staffed and managed. He also questioned the behavior of some landlord rep agents and their landlord clients who make it difficult for tenant rep agents to operate. There can be a tendency not to disclose key relevant information to tenant rep agents trying to assist their clients and/ or trying to block them altogether from representing their client by continually trying to deal with the client directly. “Most tenants have a desire for sustainable features in the properties they occupy.”
Regarding the complaint that tenant rep agents can and do seek fees from landlords in most markets even though they are representing the tenant side, the tenant response was that it’s simply a case of following market norms a good tenant rep is not doing a good job if he/ she does not try to seek a fee from the landlord, therefore most likely limiting or removing any client fee obligation.
The Punch Line: An audience member took a shot at the landlord side, noting that in some markets landlords do so many transactions subject to confidentiality clauses that it becomes very difficult to determine current market rents. This is turn causes tenants to become more aggressive in their demands than they might otherwise be and/or seek alternatives to allow room for negotiation with the landlord.
The Result: Through its combined effort, this round went to the tenants, making it 2-1 for the tenants heading into Round 4.
Round 4: Design Features & Benefits for Landlords vs. Tenants
With Tan taking on Newgreen in an epic battle of these undefeated contestants, Tan sought an early win in Round 4 by listing the number of different areas in which landlords have already accommodated the needs and desires of tenants in modern buildings:
- Increased floorplate areas for better efficiency
- Increases in floor loading (minimum of 3.5 and up to 5 KN/sqm instead of previously 2.5 KN/sqm)
- Increases in floor height (3m), as tenants have increased their needs for raised floors
- Energy-efficient buildings
- Security access complying with international standards
- Software (leveraging new technology)
- Tenant satisfaction programs
Newgreen conceded that in a number of markets there have been significant improvements in building design and features but not by all landlords and that when these features are provided, the tenant pays the cost at the end of the day in terms of increased rent and building management fees. Further, landlords are often not looking far ahead enough in their design and specifications, providing buildings that are good enough for today but insufficient in the reasonable future. As such, landlords in general should work more closely with tenants in determining the best design for future demand. Landlords should also be more open in their project costing and maintenance charge allocation so that tenants know more about what they are paying for versus what the landlord is in fact investing at his/her end. Asia, in particular, was noted in this regard because of the black-box nature of maintenance costs in this region, which are in reality, additional rent.
The Punch Line: Tan’s early attack backed up by hard facts of building improvements made by major developer landlords in recent years was persuasive with the crowd.
The Result: A close win for the Landlords, making it 2-2 heading into the final round.
Final Round: RFPs Do They Help, Or Do They Hurt?
Chew again took up the case for the tenants, taking on Vivian Ahn of AIG Global Real Estate. The tenant side began by justifying why tenant-issued RFPs are important and helpful in facilitating transactions:
- Most MNCs require transparency in their processes and adequate fair competition for their business, as part of their obligation to demonstrate cost efficiency.
- A well-run process may start with an RFI when there is a long list of options to be considered followed by an RFP to only shortlisted landlords. As such, good tenants try to mitigate the impact of the RFP process on landlords.
Responding for the landlords, Ahn dug in with some winning points of her own:
- The RFP can look like a shopping list not noting the client’s most important requirements causing a lot of work for landlords to respond in aspects that may not be important to the tenant.
- Landlords can put in significant work responding to an RFP and then receive no feedback from the tenant/ tenant’s advisor making it hard for the landlord to know if and how it could have improved its submission.
- The main purpose of a tenants’ RFP is often simply to obtain data to pressure its current landlord for rental savings, making it hard for bidding landlords to have much enthusiasm for the process.
- Property agents managing the RFP process for tenants can be a better bridge and can help mitigate some of these concerns.
- The RFP process can make it hard to identify genuine tenants since often tenants/tenant’s agents run RFPs with the tenant having no real intention to move or take up new space. Tenants/ tenant agents running anonymous RFPs are also a concern. It’s hard for a landlord to target the response appropriately when the tenant is unknown.
The Punch Line: Chew made a strong case that RFPs are an important part of most major tenant MNCs processes. Ahn was equally strong in her key points that tenants should look to get only the information they need from RFPs, give landlords feedback on their submissions and try to minimize the impact on landlords of the RFP process.
The Final Result: Three successive votes were held, and in the end the verdict was too close to call with a draw declared. Despite the strong debate of this session, both the landlord and tenants were named winners.
If landlords and tenants are free to acknowledge their differences and balance their contradictions, but engage in meaningful debate around them with a view toward mutually beneficial solutions, perhaps our industry would grow at an even better rate.
