When looking for a new office space or renewing a current lease, there is a general timeline to follow. Tenants that start the search too soon or too late will find themselves negotiating from a position of weakness. Landlords typically aren’t interested in tenants that have too much term left on their current lease, and desperate tenants won’t get the rate they need.
“When a company waits too long to begin their real estate search, they often reduce their options and therefore put the landlord in a position of higher leverage,” says Heather Densmore Shover, a Vice President with the Dallas office of Grubb & Ellis Company. “At that point, the landlord can charge a higher rate for the tenant.”
Smart Business spoke with Shover about how tenants can determine when they should start looking for a new place.
What timing pitfalls should businesses be aware of?
You don’t want to start the search too early, because the landlords may not be interested in keeping their space off the market, unless you are a very large tenant. Typically, however, you are not an attractive prospect if a landlord must wait a long time for your current lease to expire. They don’t want to sign a lease with you and then not see any rental income for a long period of time. So the tenant is going to have the most negotiating leverage if the landlord can start realizing revenue at some point in the near future.
Another instance in which a tenant’s current landlord would have more leverage is when the tenant would have considered moving to a different building but they waited too long to begin their search. At that point their choices are limited because there is no time to build out a suite at another building.
When should a business owner begin looking at real estate options?
Six months prior to lease commencement is a good target to start touring. Some tenants may want to start looking earlier than six months out if they have a renewal option at their current space and are required to give the landlord nine or even 12 months notice if they want to exercise that option. They will need to hit the market and explore their options well in advance of the required notification period in the event they decide to stay where they are and negotiate with the current landlord.
Are there other exceptions to the six-month guideline?
Smaller tenants (up to 2,000 square feet) tend to wait longer before beginning their search for office space. While this may limit their choices, there are typically numerous options for space in that size range. In addition, ready suites (suites that are in move-in-ready condition) are becoming more common.
As long as that ready suite fits tenants’ specifications, there is no downside. The landlords are taking on more risk, because they are spending money on the build out before they actually have a lease to secure the rental income.
Large tenants (50,000 square feet or larger) usually start their search much earlier — sometimes starting the search 12 or 24 months out. There are a couple of reasons for that: First, they have fewer options to begin with, so it’s going to be more important to them to secure their real estate needs and make sure they do have a space when they are ready for it.
Second, tenants of this size often negotiate with various cities for incentives that affect their real estate decisions, and these negotiations do take time. Finally, very large tenants often consider build-to-suit options and it could take 12 to 24 months to build a building to accommodate their needs.
What are the steps in the search process?
After spending a few days touring the market, the tenant (or the tenant’s broker) requests proposals from the buildings that make the short list. The proposal and negotiation phase could take two to four weeks, and the lease negotiation and execution stage can take another two to four weeks.
In the proposal and negotiation stage, the tenant receives proposals from various buildings on its short list and spends a few weeks negotiating terms with the various landlords. Ultimately, that helps tenants decide which space they will go into.
After coming to terms with one building, the lease negotiation begins. Really, a lot of the terms have already been negotiated in the proposal phase, but now you are talking about legal language. Lawyers get involved and that can slow the process down.
You can’t start the build out until you have a fully executed lease signed by both the tenant and the landlord.
How long does the build-out process take?
A full build out of a space to your specifications typically takes 60 to 90 days. If you don’t have this much time, you may have to take the space in its as-is condition and make your company fit the space.
There is quite a bit involved in the build-out process, even before hammers start swinging. First, there is a design phase where you work with an architect to create a final space plan. Then the architect creates construction drawings and typically two to three contractors then bid the work. Finally, for most jobs, you must get a permit from the city. Depending on the city, it can take anywhere between two days and three weeks to get a permit signed. At that point, the hammers start swinging and your office space begins to take shape.
HEATHER DENSMORE SHOVER is a Vice President with the Dallas office of Grubb & Ellis Company. Reach her at (972) 450-3348 or [email protected].
