Help! My Landlord Wants to Double My Rent!

ScaredIf you’re an office tenant in San Francisco (or any other market where vacancy is plummeting), there’s no doubt you’ll probably face a substantial rent hike upon your upcoming lease expiration. Since 2010, rents in the City have risen 39% and in 2012 alone, 24%; representing the biggest gain of any market in the world.

Relocating your office can be expensive and disruptive to your business, so if your first choice is to stay and renew, here are a few strategies that can help mitigate the rental increase.  The days of passive negotiation are gone; you need to be proactive.

  1. Renew your lease as early as you can.  The sooner you renew, the lower your rate will be.  Unfortunately, your landlord is also aware of this and typically will not renew your lease if too much term is remaining.  They’d much rather have you come back to negotiate at a later date, when rents are higher.  Every ownership is motivated by different things, however, so it doesn’t hurt to begin the dialogue early. 
  2. Explore options outside of your building.  Even if you fully intend to stay, you need to get out in the market and see what else is available.  You cannot expect to have any negotiating leverage with your landlord if their property is your ONLY option.
  3. Explore options within your current landlord’s portfolio.  If you’re getting priced out of your current office space, perhaps there’s a less expensive option elsewhere in the building on a lower floor, or even within another building your landlord owns.
  4. Reduce your square footage.  One of the most effective ways to reduce your monthly operating expenses is to simply lease less space.  Identify inefficiencies within your current space and consider consolidation or reconfiguration.  Are there employees in private offices that could be just as effective in a workstation?  Could employees who are out of the office regularly share a common workspace? There also might be an opportunity to “give back” some space upon your renewal whereby the landlord carves out a section of your office and builds a demising wall, thus reducing your rentable square footage.
  5. Hire a commercial real estate advisor.  Your broker is the best source of market information, and when you’re well-represented, your landlord knows you have access to valuable market information and may potentially relocate if they don’t offer you a fair deal.  But your broker also knows something your landlord does: renewing existing tenants is cheaper for the landlord than signing leases with new ones. Should you leave the building, the landlord will temporarily lose rent while the space is unoccupied. Also, brokerage commissions and tenant improvement allowances are typically higher on new leases.  Your broker will quantify these costs, translate them into real numbers your landlord can understand and then make a business case as to why your renewal rate should be lower than their current asking rate.

Rental increases are a natural part of the cycle and being prepared and proactive is the best way to mitigate an inevitable rental hike.  Ultimately, you’ll need to weigh out the two options of either staying in your space and softening the blow, or relocating to a less expensive building or submarket.

See also: When is the Best Time to Renew an Office Lease?

How much office space should I REALLY lease?

Leasing too much (or too little) office space can be a costly mistake, however determining exactly how much space you require is one component of the leasing process that is often rushed or inaccurate.

Unfortunately, our industry is partially to blame for this.  Tenants often think they need more space than they actually do, and since a broker earns more when you lease more, they may be the last person to tell you that you could scale back.

Taking the time to identify the size, configuration and quantity of each element of your new office will not only save you time and money down the road, but chances are you’ll find that you require less space than you originally thought you did.

Old rules of thumb such as, “tech tenants require 150 square feet per employee, and law firms require 350” is an unreliable measure and nothing more than an insightful metric for spotting a gross irregularity; there are far too many variables involved in determining your space requirement to simplify it in this way.

A better and more accurate solution is to take an analytical approach by using a tried and true Excel spreadsheet.

First, calculate the quantity and size of all your desired offices, cubes, conference rooms and supporting spaces such as kitchens, server rooms, storage closets, reception area so as to arrive at your Net Square Footage.

Then factor the following into your spreadsheet as they’ll substantially affect your true space requirement.

  • Circulation Factor – this is simply “the space between” and takes into account all the interior space that hasn’t yet been accounted for such as hallways and walkways between cubes.
  • Load Factor – Buildings add a percentage on top of the actual square footage of your office to account for common areas such as lobbies, restrooms and hallways.  This is the difference between the Useable Square Footage (USF) and Rentable Square Footage (RSF). Properties can vary greatly in how efficient they are, and a good broker will not overlook this important factor.

Finally, this exercise will yield an accurate square footage of what you require today, but what about in the future?  Take time to consider factors that will affect your space requirement throughout the term of your lease such as hiring or consolidation, planned mergers and acquisitions and changing in funding schedules.

4 Essential Office Leasing Tips for Non-Profits

Non-profit organizations are typically more cost-sensitive than for-profit companies and usually have unique funding schedules and decision making processes that must be recognized and accommodated for.  Maximizing value and crafting flexible terms during an office relocation or lease renewal should be paramount to your real estate goals.

1. Hire a real estate advisor. Adding a seasoned real estate professional to your team is going to prove invaluable, as they help navigate your organization through the tricky waters of the commercial real estate leasing industry. They’ll also help to level the playing field when negotiating with landlords and their brokers, and they’ll do all the heavy lifting so you can spend your time focusing on your core business and furthering your organization’s mission.

Since leasing commissions are paid by the landlord, and NOT the tenant, there’s absolutely no reason why you shouldn’t access your right to professional representation. Remember, “a lawyer who represents himself has a fool for a client.” Give preference to a broker who has board experience with non-profits, as they’ll understand important nuances and be able to structure the best deal for you. Also, don’t be shy – ask your broker to make a donation out of their real estate commission to your organization after the transaction is complete.

2. Don’t spend too much on rent. Foundations and donors carefully scrutinize your organization’s budget, and want to see that the majority of their money is being spent on the mission and not just your operational costs. After employee payroll, the office lease is typically the next biggest expense on your income statement. Therefore, slimming down your office rent is going to make your organization look more attractive to money sources while freeing up much appreciated liquidity.

Attracting and retaining top talent is important, so try and find the nicest space at the best cost and make sure you’re being mindful of how efficient the building you’re moving into is. A good rule of thumb is to identify properties where other non-profits have made their home, and then ask a few current tenants if they’re happy with their experience at that property.  Being around other non-profit organizations is also conducive to collaboration and strategic partnerships.

3. Align the lease with funding your schedules.  It is crucial that you make an assessment of your organization’s key funding dates and schedules, and then share that information with your broker so that they may structure an office lease that is not only congruent, but complimentary to your timing.

For example, if your largest grant is renewed every two years, then you want to ensure that there are strategies in place to respond to the unfortunate scenario of the potential discontinuation of that grant. The current stage of the real estate cycle, your leverage as a tenant, and the willingness of the landlord to work with you will all play key factors in what strategies are employed.

Should office rental rates be trending downwards, then an easy solution would be to simply make your lease coterminous with your funding schedules and include tenant friendly renewal terms. However, if rents are rising you’ll want to lock in a low rate and sign the longest lease your strategic plan will allow for, and then build in early termination clauses.  Another solution could be to negotiate terms that will give you the flexibility to be relocated within the ownership’s portfolio without penalty, should you need to downsize substantially.

4. Get free furniture.  One of the most unnecessary expenses upon moving is the cost of relocating existing or purchasing new office furniture.  If you’re relocating your office, give preference to “Plug & Play” subleases where the subtenant is allowed to acquire or simply use the existing furniture for no additional cost throughout the duration of the sublease.

If you have to leave furniture behind, consider donating it to another fellow non-profit, as the cost of disassembling, moving, and reassembling office furniture can sometimes cost almost as much as simply buying new office furniture anyways. If your new location does not have furniture, consider looking for used furniture. Not only will harmful VOC’s (volatile organic compounds) already be “off-gassed” which will help improve the indoor air quality of your new office, but many companies give away unwanted furniture to non-profits so as to benefit from the tax deduction.