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Commercial Basis: 7 Mistakes Companies Make When Leasing Office Space

Thought Leadership // Jan 13, 2016

I Heart Music Office

Photo credit: John Muggenborg

‘Commercial Basis’ explores how technology, branding and demographic preferences are shaping office and retail real estate in New York City. As these forces break down the barriers from where we live to where we work and shop, Lead Commercial Specialist Alex Cohen will assess the impact on real estate values and opportunities.

1. Putting cost far above all other criteria.

Real estate occupancy expense is a significant cost for most businesses. But to focus singularly on rent per square foot in today’s environment is short sighted at best. In a tight labor market, the choice of neighborhood and the appeal of a firm’s office space may be critical to attracting and retaining talent, particularly if a firm seeks to appeal to Millennials, who not only appreciate salary and benefit opportunities, but want to work in an environment that reflects the values of the company for which they work. The quality of space, particularly if its character and design supports collaborative creativity, may also generate important productivity advantages. An office space’s efficiency–how the rentable square feet (the square footage on which a tenant pays rent) correlates with programmable or “usable” space–may also make pure per rentable square foot cost comparisons erroneous.

2. Focusing on the space they need today rather than what they will need 18-24 months from now.

Time moves quickly. And most office leases are five to ten years in term. Too many companies, particularly those in growth mode, decide on an appropriately sized space based on their anticipated head count within only the first year of the lease. Some worry about taking on too much space before it’s needed, but the reality is the ability to offer surplus “desk space” to other firms if a space temporarily under capacity may be negotiated in a lease.  And it’s far better to anticipate growth than to make do with overcrowded conditions.

3. Believing that only taking “sublease” space can provide the most flexibility and cost efficiency.

It is true that sublease office space is generally less expensive than space leased directly from a landlord. In most cases, however, a sublet must be taken in “as is” condition, with minimal financial contribution from the sub-landlord to modify the space to suit a subtenant’s requirements. Typically there is no flexibility in the sublease term and the subtenant has little leverage in negotiating a favorable rent for a term beyond the sublease expiration. In contrast, leasing directly from a landlord may provide for customization of the space either built by the landlord or by the tenant with a landlord’s “contribution” subsidizing the cost. A direct lease may also provide for options and flexibility to accommodate potential occupancy growth.

4. Not anticipating how long the space acquisition process will take, particularly when a lease expiration looms.

When one rents an apartment directly from building management, the lease process typically takes less than five days. In contrast, negotiating an office or retail lease can take from two to eight weeks, depending on the attorneys involved, the complexity and length of the lease and other factors. Prior to lease negotiation, the site selection and business terms negotiation process can take from one to eight weeks for an immediate requirement that is well defined and much longer if a real estate occupancy strategy must be developed to align with business goals.

5. Planning for furniture too late in the space acquisition.

Too many tenants consider furniture planning and acquisition an afterthought. This is unfortunate for two reasons: First, the lead time delivery of contract furniture can be four to six weeks. So, even if a space build-out is complete, the absence of installed and wired furniture means a tenant cannot open for business. Second, the placement of furniture in a space is critical to space planning, particularly for the wiring of furniture for voice and data technology which must be coordinated with the siting of voice and data ports in an office. Particularly when a landlord builds a space out on behalf of a tenant, planning how furniture will be situated and wired should be incorporated into the space design process.

6. Allowing first impressions to overwhelm rational decision making.

When touring an office space, there are lots of factors that may influence an initial impression: for example, time of day/natural light and existing lighting or density of existing partitions and furniture. It’s always best to tour space when the sun is out and it’s early in the day, but this is not always possible. Too many times a potential tenant may rule out a space in less than a minute because of a negative first impression. Spend a little time and possibly listen to the guidance of an advisor who recommends whether a space is worth a second look.

7. Not understanding a landlord is interested in the financial condition of the company actually signing the lease.

It doesn’t matter how large or successful a related or parent corporate entity may be, a commercial landlord is only interested in the credit worthiness of the actual business entity signing the lease or providing a full corporate guarantee. This is often particularly challenging for non-US-based firms that establish new US companies to operate here. Landlords do not care about the revenues or profitability of the foreign parent and do not want to pursue a foreign parent if the US tenant defaults.

A related concern is the “good guy” guarantee. Most landlords require this limited personal guarantee from a US citizen or green card holder for nearly all privately held tenants, no matter how credit worthy. The intent is to ensure, in the event of a bankruptcy or some other rationale for a tenant stopping rent payments, that the Landlord will not have to serve an eviction to get back clean possession of the leased premises (in order to lease to a new tenant).