Jun 19
How long of an office lease should I sign?
Office Space , Lease Negotiations , Tenant Representation , Office Space Negotiations Add comments
It all depends on your business and your office market.
Obviously now with it being an office tenant's market, the longer you lock in lower
rents the better. However, if rents increase upon a recovery and it becomes a
landlord's market you will be faced with increases upon renewal or expiration;
which emphasizes the need for regular review of you lease vs the market. You may want to negotiate a stabilized rent in year 3 of a 5 year lease in exchange
for an additional 3 years which extends the lease at the lower rent and gives
the landlord a tenant in the space for a longer period.If an office tenant is in an
industry which is growing they may be better off with subleases or shorter term
leases, say 2 to 3 years. A business who grows steadily needs to time their
expirations with their anticipated growth.
If an office tenant's business is
stable and not expected to grow or downsize significantly, then they may be
better off negotiating a lower rent for a little more space and locking in the
low rents now providing it is a tenant's market where they are. Despite the
economy, here in St. Louis we have one submarket with about a 4% vacancy and
space is on the market an average of 7.3 months vs. some submarkets with double
digit vacancies or availability and space on the market for over 25 months on
average.
The tenant's amount of
capital costs also will have a bearing on their length of lease. They can
amortize more improvements over a longer term. That being said, they may also
be able to get a longer term and lock in the lower rate if the landlord is able
to amortize their capital costs over a longer period.
You should also consider
the building condition. If a building is a class B now, what is it going to be
like in 5, 7 or 10 years. If you are going into older buildings perhaps the
term should be shorter so that if the building systems become antiquated or
irreparable due to lack of available parts for old systems, do you want your clients and/or employees to have to work or visit an uncomfortable
space?
Another thing that brokers can do is ask the
listing agent how the buildings lease expiration stacking is. Is it important
to the landlord to stagger lease expirations so that they do not have say more
than 8 to 10% of the building up for expiration at any given time? Do they look
at their expiration plan on a floor by floor basis to see how expirations are
contiguous thus giving the landlord a more marketable space? Perhaps a 4 or 6
or 8 year lease would assist the landlord in achieving their lease expiration
stacking and staggering goals. Working for a win/win situation like that may
get the tenant an extra $1.00 off their rental rate and if an odd length lease
term is of no consequence for them it does not matter.
Lastly, what are the lengths of the contracts
the tenant has. Do they have several long term contracts or several contracts
expiring in a given year [mostly found with government or manufacturing, etc].
If they have 50% of their client contracts expiring in 3 years they may want to
time a lease expiration to after those contracts are negotiated and negotiate
strong renewal options in the lease. They do not want to be busy with renewing
client contracts while they have to search the market or negotiate a lease, yet
they also do not want to have a long obligation beyond the major contracts in
the event they are not renewed.
