Price Taker vs. Price Maker
The phone buzzes and your leasing agent is on the line with the news that a major tenant has decided not to renew. What is your first reaction? A sinking feeling in your stomach, or a quickening of your pulse?
The answer, more than likely, depends on a simple question: in this situation, are you a price taker, or a price maker?
The price taker is one who, for one reason or another, is at the mercy of the market and will look to avoid vacancy whenever possible. When they have space to fill, they will not be driving the negotiation and instead will be pushed to accept lease terms that are at best acceptable and at worst painful.
The price maker, on the other hand, welcomes vacancy and the opportunity it represents. They have the upper hand and can push the lease terms to the limit of the current market.
A number of factors will influence whether an owner is a price taker or price maker at a particular property. Those factors may be permanent, such as location, functionality, or structural market conditions. They may be temporary, such as economic conditions or local supply and demand imbalances. Or they may be unique to the owner, such as leverage considerations, partnership dynamics, or even emotional makeup.
What circumstances might make an owner a price taker versus a price maker?
Price Takers
Location – challenged or inconvenient access, undesirable area, or limited zoning
Functionality – aging infrastructure or obsolescence (low ceilings, not enough parking, inflexible layout, not enough loading doors, etc.)
Use – specialized use with shallow pool of potential tenants, such as lab or manufacturing space
Product – commodity product type with lots of similar options in the market, such as nondescript office
Market Structure – small or stagnant market with infrequent demand
Economic Conditions – recessionary environment with elevated unemployment reducing demand
Supply / Demand – new supply outpacing demand, with more spaces than tenants
Leverage Considerations – such as restrictive loan covenants or an upcoming loan maturity
Duration of Vacancy – spaces that have been vacant longer, or high vacancy within the property or portfolio
Portfolio Considerations – cash flow needs, partnership concerns, or a risk-averse mindset
Besides accepting lower rents, the costs of price taking might include higher tenant improvement costs or leasing commissions, other concessions to lease terms such as free rent, and higher vacancy and lower rent growth over time. As such, the price taker should approach leasing with a defensive mindset, taking what they can when they can. If the situation is temporary, such as a recession driving a drop in demand or temporary wave of new competitive supply, then you take your lumps and hope you are in a better position next time. If it is more permanent, then considering a sale of the property might make sense.
Price Makers
Location – highly desirable, easy access, or unique attributes (the best spot in town)
Functionality – efficient, attractive space suitable to a wide range of tenants
Use – flexible space and permissive zoning allowing for multiple use cases (or a specialized use that fits a unique tenant perfectly)
Product – unique, differentiated product with no true equal in the market
Market Structure – a growing, diversified local market
Economic Conditions – a healthy economy with low unemployment translating to rising demand from tenants
Supply / Demand – tenant demand outpacing supply, increasing competition for space
Tenant Factors – tenants facing unique time pressure, immediate space needs, or even trying to block a competitor from encroaching on their turf
Leverage Considerations – no property debt, or no risk of landlord default if the deal doesn’t happen
Duration of Vacancy – little to no vacancy within the property or portfolio
Portfolio Considerations – ample liquidity, no pressing reason to lease below market, comfortable with waiting for the right user
Besides higher rents, the benefits of price making might include lower tenant improvement costs, little to no concessions such as free rent, and lower vacancy and higher rent growth over time. If the situation is the result of a temporary imbalance, it would be dangerous to assume that the next negotiation will work out so well. If it is a permanent advantage, then the owner should welcome every vacancy as an opportunity to drive value.
Owners that are in it for the long haul need to be willing to play defense when necessary, and offense when able. Knowing the difference means thinking realistically about where you fall on the spectrum between price taker and price maker in a given situation.