Dealing With a Changing Market:
"We're Not in Kansas Anymore."

 

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 that were normally offered  at other times. Things do tend to change.

 

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 growth 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 a minimum of 18-24 months to bring buildings that were on the drawing board back to life and prepare them for awaiting tenants.

 

What this creates is a short window of opportunity for landlords to raise the rents very quickly and recover some of the profits they missed out on from the previous years. While it took time to drop the rates, it usually takes only a fraction of that time to bring rates higher than ever. Who's to blame?

 

Landlords? Tenants? The Economy? Try all three.

 

How did that happen, and what should you do? Essentially, 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 and accordingly need more or improved space. Landlords are starting to build again. It's a business decision based on increased return for new buildings being leased out at higher rates.

 

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 at 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. No matter what, 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-edged sword—start too early, and landlords won't hold the space. Start too late, and you have fewer choices.

Take off the sunglasses and start looking at your firm's real estate from a different perspective, making sure to take these factors into account:

 

• Your revenue/occupancy ratio.

• Your adjusted expectations.