Right now, there are great opportunities to be had in the office real estate market if you know what you’re doing and where to look.
But just because it’s a strong buyer’s market doesn’t mean that you can land a good deal with little to no work. As J.W. “Jay” Wall III, a senior vice president with Moody Rambin Interests, says, you’ve got to plan the work and work the plan to get a great office lease.
“Even with the current tenant-friendly environment, there will be winners and losers, and winning is much more fun and profitable,” says Wall.
To get the best results, Wall recommends that businesses perform an existing cost analysis, develop a transaction schedule and formalize a negotiating strategy.
Smart Business spoke with Wall about the factors a business needs to consider in office real estate transactions.
What are the first steps a business should take to land a quality office lease?
First and foremost, look at the existing cost analysis. Review the current lease for problems and opportunities, measure the efficiency of the current space and assess the applicable market conditions. This exercise essentially creates the road map for the project.
Another important thing to look at is transaction schedule. If there is one fatal flaw in office space transactions, it is not allowing adequate time to complete the process. Obviously, a build-to-suit office building will require more time than an as-is lease renewal, but even simple transactions will be considerably more successful if adequate time for negotiation, counteroffers, planning, pricing, permitting and construction is factored into the equation. The potential savings can be 25 percent to 40 percent or more.
Finally, conduct a thorough market analysis. Companies making decisions without market research run the risk of overpaying for their real estate. Unless you can demonstrate realistic relocation options and available terms, a landlord will never put his or her best deal on the table. The creation of ‘fear of loss’ is critical in any potential renewal scenario. If you are an educated consumer, you will be able to make better decisions. Not only that, prospective landlords will be better able to fully address your needs and your decision-making will be based on a rich framework of relevant information.
Why is developing a strong negotiating strategy so important?
Essentially, this is a game. And from your perspective, the landlord can be a daunting competitor. The landlord has a team of people with a fundamental goal of maximizing the return on the landlord’s assets. Therefore, you need to make sure your goals for quality and cost containment are achieved. An experienced tenant representative will help counterbalance the landlord’s professionals and will ensure that your goals are met.
A key factor in getting the best results is controlling and channeling the flow of information. Mishandling information often scuttles a potentially beneficial negotiation, costing you additional rent. Fundamentally, only those making decisions need to know the details, and they need to be careful. Loose lips don’t just sink ships; they also sink real estate transactions.
Also, the typical landlord lease is written to protect the building owner from any possible problems related to a proposed tenant and is obviously very one-sided. Thus, it is the responsibility of you, your broker and your attorney to make sure that the agreement tracks the terms sheet and has language amended to reflect a more fair perspective for you. This can be a tedious and somewhat expensive process, but it is absolutely necessary to get the best possible result.
How can you make sure an office space will meet all of your critical needs?
First, visit prospective spaces, tour the common areas, check out the view, see the amenities, meet the management and drive into the garage. Imagine how it would feel to be a tenant in the building.
Second, get an interior architect on board. The architect can help assess your requirements, fit you into different spaces and aid in the development of preliminary cost estimates, which provide valuable assistance in the negotiation process. Good space planning is more than having an interior decorator make the space look spiffy. An effective space plan will have a positive impact on operating and capital requirements, employee morale, productivity and public perception.
Once you have it narrowed down to a few different spaces, a financial analysis can be prepared comparing them on an apples-to-apples basis. This analysis will normalize financial factors that complicate the real estate decision-making process, such as varying lease terms, different amounts of free rent, add-on factors (the difference between usable and rentable areas), different operating expense stops or base years and different amounts of capital required for build-out and moving.
What’s the final step?
Before the final financial analysis has been run, there may be as many as three or more sets of offers/counteroffers exchanged. At this point, a terms sheet is prepared that will minimize the chances of any misunderstanding of what the salient points of the transaction are. A good broker is also a good ‘jailhouse’ lawyer as it relates to assisting your attorney with lease terms. Not to be forgotten is service after the sale, including assistance with value engineering regarding construction costs, the selection of move consultants, etc.
J.W. “JAY” WALL III is a senior vice president with Moody Rambin Interests. Reach him at [email protected] or (713) 773-5578.
