By David Marino
As a business owner, or as another senior executive responsible for controlling costs, allocating capital and managing financial and strategic risks, your company’s corporate real estate spend is likely in the top three or four fixed costs. The real estate footprint today can directly affect employee recruiting, retention, engagement and time spent in the office.
For manufacturing and distribution companies, the spike in availability nationally creates a window for corporate tenants to right-size to reduce costs, and improve operational effectiveness, as economic uncertainties increase.
Impacting a corporation’s top line, productivity and bottom line in so many dimensions, business owners must have the right framework in thinking through their real estate decisions.
The Dos
Do think beyond the rent itself.
Companies want the best economic package with the most flexibility for a space that works for their operational, cultural and locational requirements. Do not compromise those elements of the facility that you are going to have to live with for five or ten years over marginal economic savings. Get what you want at the lowest price, not the lowest price for something that will be regrettable.
Do think about rent per month, not just rent per square foot.
So often, business owners and executives focus simply on the rent per square foot. However, it is the square footage of what you lease that has just as big an impact. Too often, companies renew a lease in a space that is oversized, as they fear the cost and disruption of moving. However, if you can right-size your footprint by 20% or 30%, and improve your position in the marketplace, I’ve found it’s often possible to break even on those relocation costs in less than a year.
Also, depending on the building shape, floor plate size and whether you can be on a single floor or share a multi-tenant floor that’s less efficient, the rent will be impacted much more by the chosen space itself than a few cents off per square foot.
Do make sure that your lease term length aligns with your business objectives.
Business owners often think that there is a rule for how long a lease should have to be—three, five or 10 years. The length of a lease term is negotiable, and it should align with your business’s potential exit timeline, your future need to expand or contract and the concessions you can secure by committing longer.
Expansion, reduction, termination and subleasing rights are all things that can be negotiated to provide flexibility, but you have to consider that the lease liability goes onto your balance sheet.
Be cautious of signing for longer than you are comfortable, as oftentimes companies get induced into a lease term of seven to 10 years only for a few more months of free rent concessions, increasing the risk and liability by 40% to 100% for only a 4% to 5% improvement in the economics.
The Don’ts
Don’t get caught short on time.
Landlords don’t often rush tenants to the negotiating table, as they want to see tenants run out of runway for a potential relocation. Instinctively, as a business owner, you might think that landlords would want to lock you in well in advance of your lease expiration. That is often not the case, as some landlords will try and slow-play the process so you do not have the time necessary for an orderly relocation process, which can take a year or more.
For any lease with over 20,000 square feet of office space, or any other specialized manufacturing, research or large industrial requirement, a prudent executive should be initiating the process at least 18 to 20 months in advance of the current lease expiration date.
Don’t renew a lease by exercising a renewal option.
Renewal options are written by landlords, and unless the option is at a fixed price, the option does nothing but assure you right of possession of the premises at the end of your lease term. Once a tenant has exercised their renewal option, it sets in place a landlord-favorable process of looking backwards at the market, and the tenant loses all leverage and optionality.
Whether you have an option or not, I’ve found it’s best to be in the market, looking at your relocation alternatives and having the landlord believe you are one foot out the door and negotiating elsewhere. Do this well in advance of the option window, 14 to 20 months before the lease expiration date, versus the conventional 8 to 12 month renewal window. The minute you tell your landlord—or worse, your landlord’s broker—that you intend to stay and exercise your option, your fate could be sealed to overpay.
Don’t think of your landlord’s broker—or any other landlord’s broker—as your independent representative.
Landlord listing brokers are the outsourced sales and marketing agents for the building owner—the landlord’s proxy. Your conversations with them are not confidential unless expressly stated. They likely know your limitations and whether you are considering other options.
Landlord listing brokers serve the building owners first, above all others. They often seek to steer tenants into their listings (and financially, they are incentivized to do so) and can play favorites with the listings they have (or that their company has) or with owners with listings they want. The structural role of listing brokers in commercial real estate is to help landlords maximize their asset value through the rent the tenant pays, and to get their buildings leased or keep them leased.
Fundamentally, the commercial landlord is providing a good and service to the tenant, which is the utilization of the building over a certain contracted time horizon, in exchange for the rent the tenant pays.
However, it is the tenant that writes the check in the relationship, inherently making the tenant the customer. With the right framework, a business owner or executive will not just level the playing field, but ultimately create a competitive advantage for themselves as the rent-paying tenant.
