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
[email protected].
