Current economic conditions have caused many tenants to consider their lease options even more closely. As such, what has been a typically routine process has now become somewhat clouded as companies try to match corporate strategies with uncertain business forecasts. Considerations as to current needs as a result of possible downsizing, efficiency of space utilization and future needs when economic growth returns are just a few of the issues facing tenants in the new year.
“We have engaged with a variety of tenants who are looking at the near term with understandable concern. They are trying to factor in known variables and attempting to gauge some yet unknown issues all while trying to make good business decisions,” says Michael Hoffman, a first vice president and office specialist with CB Richard Ellis in Tampa. “In some cases, depending on their core business, the revenue picture is questionable and, therefore, the expense line becomes the primary driver in the lease process. While perhaps necessary for some, the reality is that it has to be recognized as a short-term solution.”
Smart Business sat down with Hoffman to discuss how this issue is affecting office tenants as they try and assess all the ramifications that affect their leasehold interest and ultimately their business.
How has the lease process changed over the past year for tenants?
Overall the process remains pretty much the same, but in many cases, the variables facing today’s tenants have become more complex. Economic conditions have changed so fast and have cut so deep that many firms have been forced to react versus follow a more typical lease process. Purely financial decisions at times can clash with a firm’s more strategic needs such as location, identity, expected growth needs and proximity to valued employees. This can be very unsettling as the office environment plays such an important role in adding internal stability in the face of external disruptions.
What then is the effect from the landlord position?
First, I think it is important to remember that the best situation is when there is a good, ongoing working relationship between the landlord and the tenant. Good communication from both sides helps frame current conditions so both parties can work to find the right common ground. As a businessperson, the landlord understands the complexities facing a number of his or her tenants and is equally motivated to find a mutually agreeable solution. Cost, time and operational disruption affect all concerned. Bottom line — retention of quality tenants remains very important to ownership in many ways.
Are there significant differences in short-term and long-term lease commitments?
Yes, and from both sides. From the tenant perspective, a short-term decision may allow them to bridge a period of uncertainty, as we noted. A sublease situation may also provide a below-market lease rate for some interim period. The downside is that the client will then be facing the same decision again soon, which can be both time-consuming and potentially a distraction to its core business. In addition, short-term commitments can very often be effected by the needs of more established long-term tenants. From the landlord side, the ability to have a stabilized tenant base is important both for the economic value of the property but also in determining what the landlord can do for the tenant. In addition to the base rent, the ability to provide and amortize capital dollars for tenant improvements over a typical five-to 10-year lease can serve to make the transaction plausible for all concerned, especially considering today’s financial markets.
How early should the lease process begin?
It is almost never too early to have conversations about current space obligations and, perhaps more importantly, future needs. Businesses have created an established place for both their employees and for their clients so the importance of timely communication goes well beyond simply the economic terms. In the past, most tenants engaged in lease negotiations process 12 to 18 months prior to lease expiration. An early lease renewal may afford at least one point of stability as we navigate some uncertain times ahead. It is worthy to note that with limited new construction, alternative solutions within existing buildings could dissipate quickly when the market turns and demand increases as businesses look to expand. So for all the change facing the market, the old adage ‘don’t put off until tomorrow what you can do today’ is still relevant in this case.
MICHAEL HOFFMAN is a first vice president and office specialist at CB Richard Ellis in Tampa. Reach him at (813) 221-7472 or Michael.Hoffman@cbre.com.