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 protected].
Managing Director, Brokerage Services
CB Richard Ellis
