Happy Holidays. Closing out another year. This year I focused on how to improve my capabilities to better serve you and how to open my eyes to collaboration opportunities with vendors so that we can better help each other build our skill sets and offerings. This has been the year of the big rent increase. It has been tough for some, an opportunity for others and something we’ll surely face in 2020. Let’s laser focus on how we can learn from this and do better to overcome this obstacle.
Most Common Issue
Rents are up. This is undeniable. The majority of my clients sign 5 year leases. What were rents in 2014 and how does that compare to today? 2014 rents that have escalated 3% every year for 5 years are 15% higher than the day they were signed. Rent increases that landlords are passing on to their tenants are 8-42% on top of that. This is causing consternation for 100% of the executives. Dealing with this reality is something akin to the 12 step program as everyone comes to terms with this reality in their own way. The most common topics discussed internally are:
- Why is rent so high?
- We should wait as long as possible to deal with this for the market to soften.
- Should the landlord give me a break since I pay my rent on time and have been a good tenant?
- Should I move to get a better deal?
- What’s it going to cost to move?
Discussing and coming up with preliminary plans 12 months out is ideal. If we are in 100,000 SF of larger, 12-24 months is preferred. Ideally we are updating on an ongoing business, providing insight quarterly in advance of any time of actual renewal, relocation or purchase. I love working with executives on a periodic basis to refine our strategies each year. It makes for fewer surprises, better decisions and better forecasting.
Lease Document Review
It is easy to forget all of the legal minutiae that went into your warehouse lease 5 years ago. Pull it up, dust it off and read through it again and I’m sure you’ll be surprised. Items that warrant double checking:
- Lease Expiration Date – Be crystal clear on this.
- Lease Option to Extend – 20% of the time companies that had an option to renew their lease and didn’t use it. That is okay if it is a conscience decision. But if it isn’t you may be surprised when your landlord puts the building on the market. Once your building is on the market, all bets are off and you are competing with the open market for the chance to remain in your own building at what ever rates competitors are willing to pay.
- Surrender – Knowing how you have to repair or replace components of the building upon lease expiration is important to be cognizant of. Sometime you have to repair or replace the roof, replace HVAC units, reslurry the asphalt, replace the roll up doors or levelers, remove mezzanine, or restore the office to its former condition. These are non lease rate items that we negotiate in each lease renewal that have a real impact on cash flow.
Space Utilization & Efficiency Review
On the collaboration front, I have been spending more time with architects, project managers, general contractors and material handling specialists. These are the people we rely on to make the most of the space we have to work with when we renew. The last thing we want to do is pay a higher rental rate andhave an inefficient layout. Often times we can negotiate a reworking of the office layout to be able to increase headcount in the same space, to upgrade the warehouse lighting to LEDs, or to add another dock position as part of the negotiation as a landlord concession.
Maximize the Negotiation
There are countless areas for negotiation when you have the right team focused on your project. Lease rate, annual increases, property tax audit, CAM reconciliation, new base year, security deposit return or burn off, free rent, half rent, physical components of the building, surrender items, interior tenant improvements, air conditioners, roof repairs, sky lights, lighting, are just the first 15 items. We cover all of these items and more, determine their value to us, their value in dollars and shift our leverage in the negotiations accordingly.
Blend & Extend + Sublease
Have extra space? People who have signed leases 3-8 years ago now have ridiculously low lease rates compared to today. We have been helping companies sublease out parts of their warehouse at higher rates then what they are paying. This isn’t meant to be a profit center, however, the net result is that the excess space that was causing excess overhead can be turned into an asset that is generating income. Not a bad way to reduce size without spending $100,000’s to relocate.
We often times will bring on developers when we have requirements of 50,000 SF and larger as they are looking for land and projects to build and we can often time find solutions a year in advance and before the development is public and on the market. This is a great way to produce a win win outcome and to gain visibility into your available options.
Let me know what’s on your mind and I’d be happy to connect and collaborate with you. I’m happy to help!