Commercial real estate outcomes hinge on negotiation and strategy. Over the years, I’ve had the opportunity to work as part of hundreds of transactions. While I don’t have quantitative data to illustrate the point, experience would suggest most negotiations within commercial real estate primarily revolve around one aspect of the agreement. I don’t even have to write what it is—you already know.
I recently lost a game of strategy to a three year old. The backstory goes like this—a few weeks ago my oldest son was introduced to Connect Four. You remember the game—two players take turns dropping checkers into a vertically suspended plastic grid in an effort to get four connections in a row—hence the name. Now, Todd is pretty good at identifying horizontal or vertical connections, but hasn’t quite mastered seeing the diagonal opportunity—and so I won, every time…until I didn’t.
When I lost, my strategy hadn’t changed and my strategy wasn’t the problem. The problem was being focused on a singular way to win. So while I was doggedly working toward getting the fourth checker in my diagonal connection, my son said “Good game, Daddy” with a smile on his face because he had already dropped his fourth red checker and won the game.
If your negotiation strategy is focused singularly on the lease rate or purchase price—chances are you are losing too; it just costs you substantially more.
Undoubtedly, price is important. Often though, it’s treated as if it’s the only item of importance. It’s not—the value of a deal can be altered through delivery condition, commencement or settlement dates, improvement allowances, options, and internal financing structures, among hundreds of other more nuanced techniques. It’s okay if none of these terms make any sense. Unless you’re deeply involved in commercial real estate—they probably shouldn’t. The point is there are a lot of different levers that can be pulled to create the right deal, but most of the time the price lever is the only one that is worn out.
And that’s a problem, because a negotiation strategy that is singularly focused on price almost certainly presupposes the deal is exclusively about your wants and needs, which is a costly mistake. It leads to the “High Low Game,” which is without question the most common approach to negotiation. It goes like this—the seller starts high, the purchaser responds with a lowball offer and price based offers are traded back and forth until both parties reach an agreement on a price with which neither are particularly happy. Besides being mind-blowingly frustrating, horribly inefficient, terminating deals that could have otherwise been made, leaving tremendous value untapped, and often, damaging relationships—it’s a great strategy.
Connect Four is a zero sum game based on perfect information—there can be only one winner and you always know where your opponent stands. That’s not true in commercial real estate or much of life for that matter. The very act of negotiating in good faith provides the opportunity to learn about what the other needs in an effort to gain something you value more than they do and vice versa. Simply, it allows for both parties to maximize value (it’s called logrolling). If you’re not engaging in this type of negotiation—trust me, others are and they’re happy to concede slightly on the one thing you desire in exchange for everything else they want—and you thought losing to a three year old was embarrassing.
Tim Reamer provides commercial real estate brokerage and consulting services with Cottonwood Commercial and specializes in retail representation, investment property (multifamily | commercial | NNN), and development projects. Learn more at www.timreamer.com.SHARE