While most financial experts agree that the more your business earns, the more rent it can afford, you don’t want to stretch your operating budget too thin. The general school of thought recommends keeping that expense to 10% or slightly under to protect your bottom line.
The cost of commercial real estate (CRE) depends on many factors including location, city/ town, size of the space, and amenities available.
When your lease is about to expire or — as CRE brokers recommend, at least six months before it’s up — it makes good financial sense to evaluate your options. In some cases, renegotiating and renewing your lease is the right decision. In other cases, it may in your business’s best interests to relocate and rent a new space.
Here are some important factors to consider when your commercial lease is up for renewal.
The term “resimercial” design has cropped up the past few years. Its concept is simple: companies incorporate concepts from hospitality to create spaces for employees to relax, recharge, and engage with each other.
When you’re considering whether to renew your lease or move to another location, it’s become more critical to think about available amenities and what your employees would value and use.
- Are spacious conference rooms important?
- Do your employees rely on on-site eateries or a company cafeteria?
- Is it important to have outside space for meetings or relaxation?
- Have your employees come to appreciate the building’s rooftop gym and yoga area?
- Does the current space layout still work?
Today’s professionals value a definitive “live, work, play.” In New Jersey this theme has driven the growth of more walkable developments where residents, like those in Newark, Hoboken, New Brunswick, Morristown, and Jersey City, want access to housing, entertainment, and their jobs in close proximity to one another.
Think about where your employees live in relation to where they work.
- Are the commutes reasonable?
- Is affordable housing available within walking distance from the office?
- Can your employees access public transportation?
Green Building Initiatives and Energy Optimization
Many states including New Jersey have embraced sustainable building practices as a necessity for reducing carbon footprints, lowering energy costs, improving efficiency, and optimizing energy. If energy optimization and green buildings are important, think about whether your existing space:
- Takes advantage of alternative energy sources
- Features an updated energy platform
- Encourages and facilitates tenants’ abilities to take advantage of energy savings and/or support energy saving initiatives
Naturally you want to provide as safe and secure an environment as possible for your employees. Many designers apply a Crime Prevention Through Environmental Design (CPTED) approach to protect building occupants from possible security threats. CPTED design principals evaluate environments from access points (entries, fencing, gating), territorial reinforcement (well-defined boundaries, well-maintained buildings), and surveillance (interior/ exterior lighting, building layout, landscape height/ density).
When you’re deciding whether or not to move, ask yourself — and your employees — how safe they feel in your current space. You can also request (or ask your landlord to request) a CPTED audit and site assessment.
Technology continues to evolve at breakneck speed. The pandemic accelerated the need for companies to embrace teleworking, but even without COVID-19, we all expect reliable access to speedy networks, state-of-the-art A/V equipment, and the most updated platforms. Now’s the time to reevaluate your company’s technology infrastructure.
- Does the building accommodate your technology needs?
- Is the building’s technology infrastructure scalable?
- Will your current location offer the flexibility to accommodate future technology advancements and needs?
Securing the Best Lease Negotiation Results
Decide whether to stay or move.
You’ll want to take time to determine whether to negotiate a new lease or move to a new space. What makes the most sense for the short- and long-term planning in your company? The following questions may help guide your decision:
- Consider connecting with a realtor who specializes in CRE to explore the market. Research the viability of other suitable locations. Compare future potential leases to your existing lease. Buildings, locations, and landlords all dictate rents, vacancy rates, and incentives.
- Think about your current and future business plans. Is your current space large enough to accommodate planned (or unexpected) growth?
- Research market alternatives. You might find a competitive, alternative option worth investigating further. Other building owners may offer lower taxes or debt, more favorable contract terms, or more desirable amenities. You can always bring that information to the table if you choose to negotiate a lease renewal.
- Analyze the cost to relocate. Moving costs add up quickly, even with a lower rental rate in a new building. Sometimes, the grass really isn’t greener on the other side.
Start the negotiation process early.
Unless you’ve got a lease option in place with your landlord, they don’t have to renew your lease. Some landlords allow tenants to stay in the premises on a month-by-month — or holdover — basis, but the landlord can terminate your lease without notice and leave you with no place to go.
Lease agreements with an option to renew usually have a notice period of six to 12 months. Take advantage of stronger negotiating power by beginning those conversations sooner, rather than later.
In fact, regardless of whether you’re staying or moving, you should review your lease regularly and monitor the market for changes. You can always proactively approach your landlord to request that you renegotiate your current lease earlier to take advantage of changing economic conditions or opportunities for savings.
Prepare your documents and information.
Whether you’re planning to renegotiate your lease or find a new property to rent, create a file with all the information you need, including:
- Your current lease contract
- Recent rent statements
- Property condition report
- Market reports
- Current competing properties
- Comparable sales (“Comps”)
Negotiating a Commercial Lease Renewal
If you’ve decided that your current space fits your current and future needs, it’s the perfect time to assess your position, check out the current CRE market, and use that information to negotiate a more favorable lease agreement.
Consider hiring a CRE broker.
Good brokers, like the CREA United members, stay updated and aware about market opportunities and conditions. They’ll help you leverage that information to your benefit — and they’ll advise and negotiate for you and help you win the best deal.
Understand your landlord’s renewal profits.
Landlords can lose significant profit when a tenant leaves. It’s usually to their benefit to renew leases with current tenants. You should, however, inform yourself about your landlord’s current portfolio and your lease’s impact and value in the market. You can leverage your knowledge of the dollar amount associated with your tenancy when you negotiate your lease renewal.
Assess the current space and how it “works” for your company.
Evaluate your space to identify anything your business might need to create an ideal work environment and/ or improve efficiencies. Your landlord might agree to upgrades and updates to technology, space reconfiguration, or employee amenities as part of the renewal negotiation if it increases the likelihood that you’ll remain as a tenant.
You’ll achieve the best results when you position yourself as a well-informed tenant. CREA United’s real estate brokers, Darren Lizzack and Randy Horning — Associate Vice Presidents of NAI James E. Hanson — offer a depth and breadth of industry knowledge to guide our commercial clients through the process of finding a suitable space and negotiating a favorable lease. Visit CREA United to learn more about how we can help you address your requirements and meet your goals.