Landlords versus tenants: the power pendulum across the cycle, MBA Training, MBA Training
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Landlords versus tenants: the power pendulum across the cycle
# Landlords versus tenants: the power pendulum across the cycle
In 2021, a tenant signing a new lease in downtown San Francisco could ask for, and get, twelve months of free rent, a six figure allowance to build out their space, and the right to walk away early if hybrid work made the office pointless. Three years earlier, in the same buildings, landlords were pushing rents up annually and offering almost nothing beyond a fresh coat of paint. Same buildings, same submarket, opposite power dynamic. That flip is the whole lesson: in commercial real estate, "who holds the power" is not a fixed hierarchy, it is a pendulum driven by one number: vacancy.
The core relationship: two players, one scarce asset
Strip away the intermediaries and commercial real estate has two primary players: the landlord (owner of the building, seeking income and asset value) and the tenant (occupier, seeking usable space at a defensible cost). Everyone else, brokers, lenders, regulators, is a supporting actor.
Power between landlord and tenant is really a negotiation over a single scarce resource: usable square footage in a location tenants want. When that resource is scarce, landlords price it like an auction. When it is abundant, tenants price it like a buyer's market for used cars.
The variable that tells you who is winning at any moment is the vacancy rate, the percentage of leasable space in a market that is unoccupied. Track it and you can predict concessions before you see a single lease.
How the pendulum swings: the mechanics
Vacancy rate feeds directly into two negotiable levers:
Face rent: the headline rent per square foot quoted in a lease.
Concessions
: everything landlords throw in beyond the headline number, free rent periods, tenant improvement (TI) allowances (cash toward build-out), early termination rights, and lease flexibility (shorter terms, expansion options).
The metric that matters more than face rent is effective rent, the face rent minus the value of concessions, spread over the lease term. A landlord can hold face rent flat while effective rent collapses, simply by giving away more free months. This is why headline asking rents in office markets can look stable even as landlords are visibly desperate.
Worked example:
A 10 year office lease at $50/sq ft face rent, with 12 months free and a $75/sq ft TI allowance, amortized over the term:
Free rent value: $50 x 1 year = $50/sq ft, spread over 10 years = $5/sq ft/year
TI allowance amortized: $75 / 10 years = $7.5/sq ft/year
That is 25% below face rent. In a tenant-favorable market, this gap widens; in a landlord-favorable market, it narrows toward zero.
Landlord-favorable conditions: what tips the scale
Landlords gain leverage when:
Vacancy is low (commonly cited healthy office vacancy is roughly 8 to 12%, market and cycle dependent, this is a general estimate not a hard threshold).
Supply is constrained, either by zoning, construction costs, or simply no new buildings breaking ground.
Tenants have few alternatives in the specific submarket or building class they need (a law firm needing Class A space near courts cannot easily substitute a suburban warehouse).
Capital markets favor sellers, so landlords are not under refinancing pressure to fill space at any price.
In these windows, landlords shorten free rent periods, cap TI allowances, push multi-year rent escalations (contractual annual increases, often 2 to 3% in US office leases as a rough norm, estimate), and resist early termination clauses.
Tenant-favorable conditions: the mirror image
Tenants gain leverage when vacancy is high. Post-2020, US office vacancy became the clearest live case study: CBRE and JLL market reports (both large commercial brokerages that publish quarterly vacancy data, see JLL's free research hub for public examples) tracked US downtown office vacancy rising into the high teens and, in some cities, above 20% by the early 2020s, an estimate but directionally well documented.
In that environment:
Free rent periods stretched toward 12 to 18 months on longer leases (estimate, varies widely by city and building class).
TI allowances rose sharply as landlords competed to attract any credit-worthy tenant.
Lease terms shortened, tenants refused to commit to 10 year deals, favoring five years or less with renewal options.
Flight to quality emerged: even in oversupplied markets, top-tier (Class A, newly built or renovated) buildings held pricing power while older Class B and C stock saw the steepest concessions. Power dynamics are not uniform across a market, they fragment by asset quality.
Why this is not just "supply and demand" in the abstract
Two structural features make the real estate pendulum swing harder and slower than in most consumer markets:
1. Leases are long and sticky. A 10 year office lease locks in a power balance at the moment of signing. A landlord who signed cheap in 2021 cannot reprice until renewal, sometimes a decade later. This creates a lag: current market power and current cash flows can be badly misaligned.
2. Supply cannot respond quickly. New office towers take years to permit and build. When demand shifts (structural remote work, for instance), landlords cannot simply "make less space." Vacancy stays elevated for years, extending tenant leverage well beyond a normal cyclical dip.
This lag is also why landlord distress becomes a lender and regulator issue, not just a two-party negotiation. When effective rents fall far enough, building valuations fall, and loans (especially those maturing and needing refinancing) become harder to roll over. This is a genuine competitive dynamics issue, not a finance ratio detour: distressed landlords sometimes accept even lower effective rents just to show occupancy to lenders, further depressing the market for everyone else. Weak landlords can drag down strong ones.
Vérification des acquis
1. What is the single variable described as the best predictor of whether landlords or tenants hold negotiating power in a market?
2. Why can two identical buildings in the same submarket see landlords and tenants swap negotiating power within a few years?
3. A landlord quotes the same face rent as last year but now offers twelve months free and a large TI allowance. What does this indicate about the market?
CHOIX MULTIPLES
4. Select ALL correct answers about concessions in a commercial lease.
Sélectionnez toutes les réponses correctes.
CHOIX MULTIPLES
5. Select ALL correct answers describing the fundamental landlord-tenant relationship in commercial real estate.
Sélectionnez toutes les réponses correctes.
Third parties that tilt the scale
The two core players do not negotiate alone:
Brokers (leasing agents like CBRE, JLL, Cushman & Wakefield) represent one side each and are paid on commission tied to deal value, giving them an incentive to close deals, sometimes accelerating concessions to get tenants signed.
Lenders set the outer boundary of landlord flexibility. A landlord with a maturing loan and a covenant tied to occupancy has less room to hold out for better terms than one with a paid-off building.
Municipal regulators shape supply indirectly through zoning, permitting timelines, and in some cities rent stabilization rules (mostly residential, e.g., New York City's rent stabilization system administered under state law) that constrain how much power landlords can exercise even when vacancy is tight.
Institutional capital (pension funds, REITs, real estate investment trusts that must distribute most income to shareholders) sometimes prioritizes stable occupancy over peak rent, accepting tenant-favorable terms to protect valuation stability.
Reading the pendulum in practice
To gauge who holds power in any given market, professionals watch:
Vacancy rate trend (rising or falling, not just the level)
Net absorption (net change in occupied space over a period, positive means tenants are taking more space than they're vacating)
Concession trends reported by brokerages (free rent months, TI per square foot)
New supply under construction relative to demand
None of these numbers alone tells the story. It is the direction of travel that signals whether the pendulum is mid-swing toward landlords or tenants.
Key Takeaways
Power between landlords and tenants is not fixed, it moves with vacancy rate; falling vacancy favors landlords, rising vacancy favors tenants.
Effective rent (face rent minus amortized concessions) is the real price, and it can diverge sharply from the headline face rent landlords quote.
Long lease terms create a lag: the power balance at signing can persist for years after market conditions change, misaligning cash flows with current reality.
Concessions fragment by asset quality: flight to quality means top-tier buildings retain pricing power even in oversupplied markets, while lower-tier stock absorbs the worst concessions.
Brokers, lenders, and regulators are not neutral bystanders, they shape how much flexibility landlords and tenants actually have to exercise whatever power the vacancy rate hands them.