Dealing With a Changing Market -
"You're Not in Kansas Anymore, Dorothy!"
For most tenants around the country who had the fortune of negotiating a lease in the times of poor economic climates, the world was a wonderful place to be. Vacancy rates were up, rents were down, and tenants could demand concessions beyond those which were normally offered in other times. Things do tend to change!!!
Simple Logic
When a recession hits hard as it did in the early 90's and again in the 2000’s, most developers, especially in California, coming off a period of rapid which some call overbuilding will suddenly have their construction projects came to an immediate halt. You don't have to be a rocket scientist to predict that when the economy turns and companies start to gear up again it will take 18-24 months to bring buildings that were on the drawing board back to life and ready for awaiting tenants.
What this creates was a short window of opportunity for landlords to raise the rents REAL FAST and recover some of the lost profits from the previous years. While it took time to drop the rates, it usually takes only a fraction of the time to bring rates higher than ever. Who's to blame? Landlords? Tenants? Economy? Try all three.
How it Happened and What to Do
For you X-Files fans, it was like three parallel universes colliding at the same time. We're all happy about the economy. Company profits are up so tenants are expanding their business thus needing more or improved space. Landlords are starting to build again. It's a business decision based on increased return for new buildings leased out at higher rates.
But what do you do, particularly if you are a small company? Now that you have the additional capital, is it fair to just turn it over to the landlord? Here are some things to think about:
Before you start yelling about higher rents, analyze your gross revenues/occupancy costs. For most office users, you should be about 6%. Paying $1.50 per month PSF on 3333 SF for a small firm grossing $1M is about the same as a company paying $3.00 for the same space based on a $2M gross. You may be spending $60K more per year, but your net profits increased. Assuming you controlled other expenses, you're way ahead of the game.
In addition, you may want to be a little less demanding than during your last negotiation. Maybe not lowering your expectations, but, if you have to relocate, maybe the layout won't be perfect, but it should meet your basic needs.
Most important, start planning EARLY and be ready to make quick decisions. Often, properties don't stay on the market long. It's sort of a double edge sword-start too early and landlords won't hold the space. Start too late and you have no choices.
Take off the sunglasses and start the look at your firm's real estate from a different perspective.
- Evaluate your Revenue/Occupancy ratio
- Adjust you expectations
- Plan Plan Plan
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