Second only to employee compensation, commercial real estate is typically the largest operating expense. With vacancy rates at recent highs, tenants have quite a bit of leverage. Even if you are happy with your location, here are some tips to insure you don’t miss out on a tenant driven market:
1. Get realistic with values/rates. You are in the driver’s seat, but owners won’t let you take them off a cliff. Expect aggressive rates and concessions for tenant improvements, moving costs or other goodies, but realize that if it doesn’t make financial sense to a landlord, it won’t happen. Besides simple cost savings, companies can “move up” in quality while paying the same or even lower rental rates.
2. Use a commercial agent, IT’S FREE! Is it self-serving for me to recommend that? Sure. But I am so confident that a knowledgeable commercial agent saves you money, time and unforeseen headaches, it would be a disservice to say any different. Landlords often have a flat commission amount regardless of whether or not a tenant is represented. Your rate won’t reflect any increase because you are represented. Studies have shown unrepresented tenants often pay more.
Landlords, doing multiple leases every year, have an agent representing their interest. Shouldn’t you? You may deal with real estate issues once every 3-5 years. Instantly, you gain leverage with representation. An agent’s property knowledge, recent transaction data and strategic negotiation skills are at your disposal.
3. What’s it really going to cost you? There is more to the decision making process than just the attractive new rate. Moving costs, operational downtime, new furnishings- these and other items need consideration. If you are only saving a couple percent per year, it may not be worth all the effort…..but you won’t know until you crunch the numbers.
“Second only to employee compensation, real estate is typically the largest operating expense….don’t miss out on an opportunity.”
4. Know thy landlord. Everybody’s hurting, including landlords. Most are honest entrepreneurs taking a risk to earn a fair return, but if “Landlord, LLC” files bankruptcy, your lease offers you little protection. The bank or new landlord may want to keep you, but who’s to say they won’t raise your rent? Properties with deferred maintenance and repeat system problems could make it miserable for you, your employees and clients. Poor management also often results in higher operating costs that are passed on to you. A quality building and enjoyable work environment may be worth that extra dollar or two per square foot. Another shameless plug: A good commercial agent will help you steer clear of shaky landlords and challenged buildings.
5. Tick-Tock: Don’t wait 30 days before your lease expires to start negotiating a renewal or begin looking for new space. You will have lost much of your leverage because you can’t realistically find a space, negotiate a lease & schedule a move in that timeframe. Depending on how well your lease was negotiated, there could be stiff “hold over” fees to stay past your expiration date without renewing. Start the process 6-9 months minimum prior to expiration. More complex or specialized requirements will take longer. If you like where you are, you may consider locking in a renewal rate even earlier before the market starts recovering.
6. Should I buy? Great question! Property values, construction costs and interest rates have dropped. If you have decent credit and owning is aligned with your business philosophy, now is absolutely the time to consider it. The Small Business Administration presently has programs with waived fees and requires as little as ten percent down for properties that are at least fifty-one percent owner occupied. A plus, you can include improvements and equipment costs in the loan. The SBA is also expected to announce it will temporarily allow long term refinancing for owner occupied buildings with maturing loans using the 504 program which is usually reserved for new purchases.
Rex Benton is Savannah Commercial Real Estate agent with NAI Savannah/ a division of Mopper-Stapen, Realtors and is a contributing columnist for BiS-Business In Savannah weekly business journal. www.mopper-stapen.com 912.238.0874 Office Retail Industrial Investment Real Estate
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