If 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.
- 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.
- 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.
- 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.
- 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.
- 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.