So What's the Market Like?
How often do I hear that question? Oh, just about every day. Fortunately, our clients have learned to ask much more sophisticated questions like this: “With my business changing, how do you think those changes may be impacted by today's real estate market?" Doesn’t that sound a little different?
Traditionally, most companies pay attention to their real estate only when the lease is running out or the company is obviously out of space. Then comes the panic—you’ll grab a broker and have him show you every possible building that is in the size range that you think you need, compare its asking price to two or three "comps," and put in an offer. The primary concern with companies in this situation seems to be, “Did I get a good deal?"
In a market that is constantly changing, the answer to both the initial question of, “What is the market like?" and, “Did I get a good deal?" may be totally irrelevant. The question should be, “Is there a space out there that will meet my needs today and in the future?"
In the eyes of most brokers and users, the market is set by what the last deal done in that building was done for (or, if it is an office property, what a comparable industrial building was leased for). The gaping hole in that formula is that you probably don't know all the deal points of that last deal and how they might have impacted total costs. So to say the market is $1.50 ($18.00) PSF could be an incorrect assumption, as it may only be $1.50 PSF for that last specific deal. In reviewing the last deal you believe is a realistic comparative deal to the one you are about to sign, it’s important to ask questions like these:
Did the tenant have to put in their own tenant improvement dollars while the landlord only paid to have the space repainted and cleaned carpet?
Did the tenant get to build out the suit to his specs at the landlord’s cost, obtain options needed for growth, extended terms, shrinkage, parking, and after hour concessions?
What is the personal liability of the owners of the business should they default on thelease?
Did that $1.50 address the value of those issues?”
As an example, IN/House recently completed a transaction for a small (but growing) law firm. Rather than scour the highlands for any space that might fit the "assumed size requirement," IN/House and the client outlined specific business needs the client could identify for both present and future use. We started by identifying head counts, job titles, and common areas needs. Next, we set standard sizes for each job title and common areas. Finally, we addressed circulation (the open areas between offices and cubes), and then added on the building’s load factors (the tenant’s share of the building’s common areas). Through this approach, we were able to establish a realistic first year size requirement.
Next came the hard part. We had to determine how those requirements, either in personnel counts or specific unit sizes, might change over the coming years. When might those changes occur? How might the overall business change?
Although this is only part of the ten-step analysis IN/House takes all its clients through (even the little 1000 SF user can benefit), the end result is the creation of what we call a "strategic facility plan." Sound scary? It shouldn’t. It is simply an outline of where your business is going and how to best and most efficiently deal with real estate issues during that time period.
Once the plan is established, you can then go "to the market" and ask landlords how they can meet your plan. This approach is much better than the more common approach of trying to fit your business into the landlord’s plan. You will be amazed, even in a tight market, what stones will be uncovered. Remember, the job of most brokers is to find tenants for their landlord's buildings. Imagine the tone of the next month's marketing meeting should the landlord find out their broker missed out on an opportunity to lease space to you.
How does the tenant benefit? Time can be best spent running a tenant's core business rather than scrambling around like a wild person chasing false or non-existent deals. By announcing to the community that these are your needs and that you want to see only buildings that can meet (or nearly meet) your specific requirements, the space you lease will be physically and fiscally what you need now, and in the future.
The motivation to complete a transaction with any landlord should be how that building best meets both your firm’s short and long term needs. One client of ours was having a difficult time dealing with the fact that a certain landlord was "demanding" a base rental rate the client felt was higher than his friend got in a competitive building. The reality was that the friend received no concessions within that lower rental rate. In fact, he had to sign a longer lease (which included unfavorable options) that will probably end up costing the friend fifteen to twenty cents per month more over the term. Going to the country club and bragging about the low starting rate now didn't seem as appealing.
Before you sign the deal, make sure it's the right deal for you. Analyze not only the hard costs, but review the potential costs of other issues included or excluded from the deal. Most importantly, plan your real estate based on your business, not on the market. Only go to the market when you’re fully prepared.