Signing a commercial real estate lease has always been a significant decision. But with rapid shifts in the real estate and financial markets, the complexity of this process has increased. Since you signed your last contract, many factors could have changed, including square footage rates, tax breaks, occupancy rates, interest rates and new construction.
“Even if you think it would work perfectly to renew, you owe it to yourself to take a look at the marketplace,” says David P. Lanier, managing director of brokerage services at CB Richard Ellis, Atlanta. “You’re invariably going to renew in a market that is different than the one you experienced when you signed your last lease.”
Smart Business spoke with Lanier about why you should carefully consider your renewal or relocation options and how to make the best decision.
Why is the decision to renew or relocate so critical?
You need to approach lease expiration with the mindset that it’s not only about the space but also about your business. You need to ask yourself, ‘Is my space helping my business?’ That could include everything from looking at how the facility has an impact on employee morale to evaluating alternative economic lease structures. Your choice of locations and facilities can have a dramatic impact on the success of your operations.
What should play a role in the analysis?
You should evaluate three main factors during the decision-making process and give them an almost equal weighting. These include financial, operational and qualitative considerations. Often businesses overemphasize the financial component, but the best analysis comes from looking at all three elements and seeing where they meet. Financial considerations could include the rate per square foot, cost to build out or retrofit a space, financing options and the tax rates.
You also need to see whether your space still works efficiently for your current operations. For instance, you may have more need for open areas or conference rooms in an office space or for different equipment configuration in a manufacturing facility. You should look at important physical adjacencies in your space and see if you have any needs for expansion, contraction or technology upgrades.
Qualitative concerns include all of the elements that make up the human experience in the space. These include the amenity base, parking situation, convenience for employees, access to transportation and proximity to clients. Although these can seem like less significant variables, they do play a significant role in recruiting and retaining good people and building confidence in your clients. We advise clients to develop a spreadsheet that lists these elements and rates them according to their values.
When should tenants begin the process?
All tenants should start looking at their options at least a year out so they don’t end up having renewal as their only alternative. The bigger your size, the further out you need to plan. If you’re a very large tenant in a very tight market, you should start examining whether to renew, build to suit or anchor a future development a good two to three years in advance.
What key individuals should participate in the decision-making?
The answer to this question really depends on the organization. If there is only one location, the head of that office would obviously participate. But if it’s a larger organization, it’s still valuable to bring in local leadership. In evaluating the qualitative aspects of a location, I recommend bringing in representatives from human resources because they know the pulse of the employees and understand their concerns. Depending on the structure of the organization, it can also be very helpful to engage individuals from all levels of the company.
In terms of which external individuals to involve in the process, you should always engage your existing landlord if you think renewal is an opportunity. If the landlord has changed since you originally signed your lease, you’ll need to work with him or her to set expectations and discuss alternatives.
Also having a broker involved in the renewal or relocation process is critical and expected in most markets. Tenants or business owners typically don’t have the time and the ability to do a thorough three-part evaluation of the financial, operational and qualitative considerations on their own. Having a broker do this research in a quality manner can have a big impact on the results of a renewal or relocation deal.
What are some of the ‘hidden’ expenses of relocation or renewal?
With relocation, some of the overlooked items include the cost of improvements and what you receive for your dollars, including technology and telecommunications capabilities. Organizations can also underestimate the cost of moving, including downtime and lost productivity.
In the case of renewal, decision-makers need to look at the cost of a major retrofit versus moving to a location that already meets their needs. Business leaders can often underestimate the disruption of having retrofit work going on around employees and clients.
DAVID P. LANIER is managing director of brokerage services at CB Richard Ellis, Atlanta. Reach him at (404) 504-7906 or email@example.com.
Managing Director, Brokerage Services
CB Richard Ellis