Office space costs are usually a company’s second or third largest expense. Lowering office space costs will significantly impact a firm’s profitability. Below are seven cost saving tips for firms considering a relocation or lease renegotiation.
1. Start the process early: The tenant benefits greatly by having enough time to evaluate his options, create a competitive bidding environment, and structure a satisfactory transaction. Unfortunately, tenants too often wait too long before they start the process, even when counseled otherwise. The smallest tenants should start their space search at least 6 months before their lease expires. Most tenants should start 12 to 18 months prior to the expiration. The largest users should evaluate their options 2 to 3 years before the expiration of their current lease.
2. Use a space planner to identify savings through a more efficient floor plan: Before tenants evaluate buildings for relocation or renewal, they should complete a space plan with an architect or space planner to identify the optimal space size and configuration. Space requirements are not static, and the space leased several years ago may no longer be the optimal size or configuration. A space planner can identify opportunities for savings with a more efficient floor plan.
3. Create a competitive bidding environment: Tenants often fail to create aggressive competition from various buildings in the marketplace, especially in renewals. Landlords know that tenants renew 70% of the time, so landlords are reluctant to give renewing tenants market terms. In a renewal negotiation, tenants must convince their landlord that they can and will relocate, even if renewal is the primary objective. Landlords recognize that tenants with proper representation will be thoroughly evaluating the marketplace.
4. Pay careful attention to construction costs and build-out allowances: Ignoring construction costs before signing a lease is where many tenants leave money on the table. All things being equal, tenants should favor sites, spaces and floor plans with lower build-out costs. When the build-out cost is substantial, tenants should insist on managing the construction, and should solicit competitive bids to manage the costs.
5. Pay careful attention to operating expense escalation provisions: A poorly negotiated operating expense and “pass-through” provisions in the lease can cost the tenant serious money over the term of the lease. Specific definitions of building operating expenses including exclusions, audit rights and, if attainable, a cap on controllable operating expenses, should be negotiated.
6. Compare options on an “apples to apples” basis: What appears on the surface to the best economic option is not always the case after a detailed evaluation of the incentives and costs. Have a qualified professional perform a financial analysis so that have a clear picture of the alternatives.
7. Retain qualified representation and utilize your own third party consultants, not the landlord’s: The landlord’s agent has fiduciary responsibilities to the landlord. The landlord’s architect and contractor may not be the most competitive in the market. To get the best deal, a tenant must assemble his own real estate team. Tenants considering a relocation or renewal of their office space lease should retain a commercial real estate broker who specializes in tenant representation for office users in their market.
February 26, 2019
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