In Orange County, CA, as in many markets, the leasing value of both industrial and office space took a sudden spike in July, 2015. One can argue as to what caused this turn but the bottom line is many tenants who signed their last lease between the start of 2008 recession and as late as 2014 were in for a big shock when they renewed their leases.
Clients who started their last lease at a rate in the neighborhood of $1.65-$1.85/SF found it increasing north of $2.00/SF and were confronted with new starting rates close to $3.00/SF.
What caused this huge increase in rents and what can you do if you are facing such a stiff hike going forward? We know that real estate is a market driven sector. Rents are loosely based and initially set on what it costs to build a building, what it cost to run it, and then a projected profit is added in. Those factors serve as a baseline but are pushed up or down by what tenants are willing to pay and what a landlord is willing to accept. Economics 101: The last deal sets the new standard.
While no one wants to pay higher prices for rent. To help ease the pain, as well as to provide a baseline for making a sound business economic decision, focus on the total dollars the new (or renewal) space will cost rather than simply the per square foot cost. That total occupancy cost should be less than 10% of your firm’s yearly gross revenues.
If the new rent is going to be too high for your budget consider relocating geographically or making a move to a less expensive property. Another option is downsizing into a property that offers more “flex” space and has less fixed offices and more open workstation areas. Many companies these days are reducing rent by allowing more employees to telecommute.
Rent is the number two line item on your budget. Prepare and analyze.
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