According to a recent report by REIS, Inc., a leading provider of commercial real estate market data, office vacancy rates rose to 17.2 percent during the first quarter of this year. This represents the highest vacancy rate since 1994.
Most industry experts anticipate that the vacancy rate will remain at near record levels for the next 12 to 18 months. Such conditions make it an excellent time to renegotiate the terms of your soon-to-expire lease. If you plan on trying to renegotiate the terms of your lease, try these tactics. In many cases a savings of up to 25 percent or more is possible:
Investigate local market conditions.
While national statistics and reports can be somewhat helpful, all real estate is local. Determine the local vacancy rates and current lease rates for your class of office space. These will serve as your starting point for negotiation.
If there is a high vacancy rate and you are paying a higher amount than many similar businesses, you have great leverage for negotiating. There is a standard system in place developed by the Building Owners and Managers Association International, which classifies office space into three categories: Class A, Class B and Class C.
While there are no strict parameters for each class, BOMA defines them as follows:
- Class A - Most prestigious buildings competing for premier office users with rents above average for the area. Buildings have high quality standard finishes, state of the art systems, exceptional accessibility and a definite market presence
- Class B - Buildings competing for a wide range of users with rents in the average range for the area. Building finishes are fair to good for the area. Building finishes are fair to good for the area and systems are adequate, but the building does not compete with Class A at the same price.
- Class C - Buildings competing for tenants requiring functional space at rents below the average for the area.
To search for lease rates and terms in your area for your office class, use a resource like LoopNet, the largest online commercial real estate listing service. LoopNet has information on over 6.7 billion square feet of properties currently up for lease across the country. Additionally, many local business newspapers publish announcements relating to large tenants that have signed a lease. The lease rate per square foot is usually mentioned.
Meet your fellow tenants.
The purpose of these meetings, besides being friendly, is to determine how much ghost space they have. This refers to the empty space that tenants are not using and have not been able to sublease. Ghost space should be added to the vacancy rate to obtain an accurate picture of the true occupancy rate.
Many landlords try to hide this information so as not to weaken their negotiating position.
Your landlord knows you. Leverage that.
Finding a new tenant is a time consuming, arduous and risky process for landlords. The benefit of finding a tenant willing to pay a little more does not outweigh the risk of leasing to the next doomed start-up.
If you are a long-term tenant with a track record of paying on time, you can use this to negotiate a discount on your current lease terms.
Investigate your landlords current financial condition.
Access to commercial loans and lines of credit is slowly improving for large companies. But small landlords still have very limited access to credit. If your landlord is attempting to refinance the mortgage on the building, it will be easier to do so with a higher occupancy rate. Your agreement to stay – as opposed to leaving which would increase the vacancy rate – may make the difference between their refinance succeeding or failing. That is certainly worth negotiating over.
Keep your options open.
It’s very likely that vacancy rates and ghost rates will continue to increase through 2011, further reducing lease rates. If your lease expires soon, try to negotiate a short term extension (usually around three years).
Make sure you include as part of any negotiation the option to assign your lease to a third party without penalty.
Remember: absolutely everything is negotiable.
Beyond your lease rate, think about everything else that you may want to negotiate with the landlord while you still have leverage. Consider: maintenance terms, credit for build outs, additional parking spaces, authorization to add signage to the exterior of the building and more. But know your limits.
One option which is usually off the table is the ability to terminate your lease early at your option because most commercial mortgages contain terms that specifically bar this.
Work with the right agent or at least avoid the wrong one.
If you are working through a commercial real estate broker, make sure they are a Certified Commercial Investment Member, a designation held by only 6 percent of the 150,000 commercial real estate practitioners in the country. You can also search for one of the 2,700 commercial real estate brokers that have earned the SIOR designation from the Society of Industrial and Office Realtors.
Want to learn more? Leave a question for me in the comments section.
Mike Periu is the founder of EcoFin Media, LLC an independent producer of financial, economic and entrepreneurial content for television, radio, print and the internet. Over the past ten years he has started three companies and advised over 50 companies on financial strategies including fundraising. Mike also hosts regular small business webinars on a range of topics relevant to business owners.