Rising Rents- Is There an Alternative?

A recent post provided a good summary addressing the dilemma facing most commercial tenants whose 5-10 year leases are coming up for renewal. Many of these tenants signed their last leases during the height of the recession, Now, Landlords are pushing the envelope to recoup what they perceive as lost revenue. Rents have jumped 30%-40% in the past three years in Orange County, CA making it the market with the greatest increase in rents according to listing agency, CBRE.

At IN/House, we always advise tenants that moving should be for a good reason and not an emotional decision. Either the suite is too large, too small, is not as functionalk as it should be for your evolving business or just not economically feasible. After all, moving is disruptive and costly. However, with the rising rents over the past three years, I've had more tenants relocating than ever before.

Most interesting is tenants in high rise properties which in this local market all such properties are considered Class A buildings, more and more are tenants are relocating into Class B mid and low-rise properties. While those rents in Class B properties may be more in line with their financial requirements and budget, the more tenants make that shift, the less available properties there are. Since real estate is a “Whatever the Market will bear” economic phenomenon it doesn’t take a rocket surgeon to see what is also happening to the rents in Class B buildings.

A lot has been said about tenants looking to buy a building rather than pay rent to some

landlord. There is much to consider before purchasing a building setting

aside the fact the purchase prices on potential properties have increased as well making that option, while stabilizing future rents, it may not always pencil out. A good topic for future discussions.

Bottom line is rents have increased considerably above your original first year rental costs but if you can afford it, renewals still remain the option to consider.