Rent Office Space Now – Rates Are Great – Think Long Term

I deal with a lot of prospective tenants on a daily basis.  The one thing that still surprises me is that while those in the market to rent office space realize that there are some great deals with respect to rate, they still think in a “short term” mentality.  Certainly that mentality is driven by uncertainty in the economy – I get that.  I submit, however, that if you have a successful business, need to rent office space and are in the market – lock up the good deals of today for the  longer term.

Like any other market cycle, this too shall pass and when it does you can bet your last dollar that rates will increase.  As a business, would you rather lock up a rate that is $2.00 – $3.00 per square foot lower today than it was two years ago and know that by the end of a 3-5 year lease you will still be at least $2.00 per square foot lower than the current rate may be at that time or would you only want to commit to a 1-2 year lease and be back in the market looking for office space to rent when rates are already on the rise?  In my opinion the former is the better option.  I would sign a 3-5 year lease today at a great rate and know I am hedging against the higher cost of the future.  In today’s market you may even be able to negotiate a renewal option that all but guarantees that your future rate will also be a “below market rate” when the first lease term expires.

I see a lot of prospective tenants that are downsizing too.  These companies  have the best opportunity to get the “double wammie”.  They can save cost to their bottom line by getting a little smaller and taking advantage of the great rates today.  Huge savings.  I still caution, though, don’t get stuck in the “short term” mentality.  Think long term.

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Lease Rates – What’s Important to You?

In my previous blog post I mentioned that understanding the two most common lease rate structures – NNN vs Full Service – are important to understand.  Please consider the following: 

Triple Net (NNN) –  Consider NNN lease rate structures like you would a home mortgage.  By that I mean you may have a mortgage payment every month but that isn’t the only cost you pay to maintain your home is it?  There are property taxes, insurance costs, utility costs, maintenance costs etc.  The real cost of your home is certainly  more than just the mortgage payment — so are Triple Net (NNN) lease rates.  To make a fair comparison between Full Service rates vs NNN rates, add the “extra” costs to the NNN lease rate.  These additional NNN cost for the Northwest Valley range anywhere from $6.00 – $9.00 per square foot, so for purposes of example: 

Triple Net (NNN) lease rate of $15.00 per square foot on 1,000 square feet = $1,250.00/month 

ADD additional net costs – utilities, CAM (maintenance), taxes, insurance etc of at least $6.00 square foot = $500.00/month 

TOTAL ESTIMATED NNN LEASE PAYMENT = $1,750.00/month (conservatively) 

ACTUAL COST PER SQUARE FOOT = $21.00 

Given that Full Service Lease Rates include all of your costs in one payment/cost per square foot,  A $19.00 or $20.00 per square foot Full Service Lease Rate is economically a better a deal for your business.

Triple Net (NNN) vs Full Service Lease Rates

If you have ever leased commercial office space or if you are currently seeking commercial office space to lease, you have no doubt encountered the two most common lease rate calculations of Triple Net (NNN) and Full Service.  The differences can seem subtle but they make a big difference in the actual cost of your office space.

Consider that a Full Service lease rate will include ALL of the expenses in one convenient lease payment while the NNN lease will only included the rent.  It can be quite costly to pay for CAM (Common Area Maintenance) charges, direct utility costs, taxes & insurance costs ON TOP of the lease rate.  Don’t forget to add these costs to a NNN rate – a $15.00/square foot  NNN rate can be a total of $21.00 – $24.00 per square foot in reality.

In my next blog I will give some typical examples of NNN (Triple Net) lease rates and why you need to consider the financial impact to your business before making a decision.

Basic Steps – Beginning the lease negotiation

Greg HerznerIn this current economic cycle there are clear opportunities for consumers.  New, growing or even downsizing companies can find great value in reduced lease rates.  Simply put, this is a great time to lease office space.

The concern for owners/managers is that prospects not be overly aggressive in their negotiation.  The reality is that there can be significant cost factors that impact an owners ability to do make a deal.  This is why information is the key. Owners need to fully understand all the needs of any prospect.  They need to fully communicate their ability fulfill all of their potential customers needs.  It is reasonable for a prospective tenant to ask for the best deal they think they can get but it is prudent for owners to quickly determine whether they can meet the expectation and communicate it early in the leasing process.

For Tenants:

  1. Make sure to understand the owner’s rate structure – Full Service, NNN (triple net), Modified Gross etc.
  2. Understand the owner’s tenant improvement cost – is enough being allowed to accomplish your build out?
  3. If there is an overage in tenant improvement cost, how will it be handled?  Will the owner amortize any overage or will you have to pay it up front?
  4. Make sure to understand how CAM or expense pass through costs are calculated and how they are billed – annually, monthly quarterly?
  5. Lastly, while you may have a certain price in mind, the owner has to calculate the tenant improvement costs, operating costs and leasing commissions in their rate offer.  If the price is higher than you desired/expected, it is reasonable to ask to review those costs.  There may be an area to compromise to achieve your rate expectation.

For Owners/Managers:

  1. Be accommodating and up front with your prospect.  Whether they have representation by a broker or not, prospects seem to assume there is some “smoke and mirrors” in the information they receive.
  2. Be willing to share your analysis of the deal with the prospect.
  3. Tighten up tenant improvement costs.  Make sure your contractors are giving you the best possible pricing.
  4. Know the bottom line you are willing to net in a deal and don’t be surprised if you get there in this market.
  5. Last but not least – be creative.  There are lots of ways to structure a deal.  Know your prospect’s needs and drive all of your decisions toward that end.

In closing, my belief has always been service and dedication to your customers and prospects will win you deals more often than not.   There is no reason for anyone to get “hurt” in a deal.  Even though the market is tough today and prospects and/or their brokers may reach pretty deep, both sides are most likely developing a business relationship that is going to last a while…..well beyond the current market cycle.

Greg Herzner