How much space should your company lease? That’s the million dollar question. Many organizations have a difficult time projecting their headcount three to five years in advance. Tenants in mid-lease term who find themselves out of space are sometimes against a rock and a hard place. Provided the current landlord has adjacent space available, it’s an easy fix. However, it is almost a sure bet the rate per square foot will increase. If your landlord does not have enough space to meet the company’s demand, alternative strategies must be explored to solve the issue. Businesses in need of expansion space to satisfy their operation may use the following tactics and strategies to help alleviate the burden:
1. Non-Coterminous Leases
Landlords love nothing more than to rent more space to their tenants. What landlord wouldn’t? Most landlords will view its tenant as a captive audience with little negotiating leverage. Therefore, it is likely the landlord may not want to line up the expiration dates. Make sure the expansion space expires the same day as the existing lease. Otherwise it will be a nightmare when a relocation or renewal occurs since dealing with two different lease expirations hinders a tenant’s free agency.
2. Landlord Demands a Higher Rate
If a landlord can accommodate its tenant’s space need it’s almost guaranteed any future expansion space will be at a higher price due to the captive audience syndrome. Comparing alternative market options that can house a company’s temporary space constraint are a must. If economics are top priority, leasing expansion space nearby from a different landlord is almost a sure bet to obtain greater concessions. Leverage this scenario against your current landlord. Depending on the price difference and the length of lease term, it may make sense to lease temporary short term off site space. Again, make sure the lease expirations match up.
3. Sublease and Relocate
I’ve seen this hundreds of times. A company is convinced its space can be sublet in no time and are encouraged to lease larger space elsewhere. The space is placed on the market for sublease and a new lease is executed. Shortly thereafter, they realize the prior space will sit on the market for 6 – 9 months without any income. Not to mention other disposition costs such as a discounted rental rate, legal fees, brokerage fees, and tenant improvement costs. Unless economics are low on the priority list, take the time to perform a conservative disposition analysis to sublease the current space and relocate. Compare these economics to a temporary fix of leasing out additional space in the current building or across the street. You’ll be surprised.
4. Expansion Rights
“We’ve negotiated an expansion right when we moved in and now that we need the space, our right is void.” Sound familiar? Most landlords hate giving expansion rights so if you were savvy enough to obtain an expansion right it was most likely a Right of First Offer. These rights burn off quickly. Next time negotiate a Right of First Refusal. The landlord must fully negotiate a deal with a third party and then give you first shot at the space. This expansion right is more likely to be valid for a longer period of time throughout the lease term.
Depending on the existing furniture layout, reconfiguring workstations and doubling up people in private offices, may be a cheaper and easier way to solve space needs.
6. Space Program
Extract pieces from the business plan that correlate into headcount for the first, second, third, fourth, and fifth years. If five years is too long then use three years. Figure out specialty areas, departments of growth, and use type. Use general rules of thumb to hone in on the number of square feet per person to account for total space needs each year. Far too many companies ballpark their space needs and find themselves with too much or too little space in the early stage of their lease.
While there is no perfect solution when a business runs out of space, the above list provides clarification and tactics to alleviate some of the heartburn when dealing with this issue. On a positive note, it is better to need more space than carry excess real estate which eats into the bottom line.
Scot Ginsburg is a senior vice president of Hughes Marino, an award-winning commercial real estate company specializing in tenant representation and building purchases with offices across the nation. Contact Scot at 1-844-662-6635 or email@example.com to learn more.