In general, the suburban commercial real estate market is very strong. There are very few buildings in financial trouble, and most Landlords are spending money to improve their properties. We are seeing more building amenities (i.e. golf simulators, outdoor grilling areas, bocce ball courts, cross-fit gyms, bike sharing), as well as major common area renovations. Tenants are certainly enjoying these improvements, and as a result most suburban buildings are over 90 percent occupied. However, the strong occupancy has urged Landlords to start increasing rental rates, decreasing concessions, and leveraging tenant relocation costs. In most cases, we would be lying if we said we could save you $4.00 per square foot by relocating to a similar quality building (and we miss those days). So, if you can’t slash rental rates, here are a few areas to press regardless of the intent to renew or relocate the office lease.
- Tenant Improvement Allowance – this capital contribution from the Landlord is standard in most scenarios, and maximizing the amount can limit out of pocket expenses related to construction, move costs, furniture, and IT. Pro tip – if you don’t need many physical improvements, ask the Landlord for a discretionary portion that allows you to pay for soft costs like furniture, fixtures and equipment. Pro tip #2 – if the space is in decent shape, ask for a deferred allowance that allows you to make improvements 3-5 years after the lease is signed.
- Base Year Reset – this is also standard in most scenarios, but there are times when a Landlord may press to retain the base year as the original date or dollar amount. Unless your base year is incredibly inflated, it’s essential to get a new number that is aligned with market operating expenses. This will eliminate pass thru expenses for the first year of the new lease and limit that amount throughout the term. Pro tip – call JLL for further explanation on this topic.
- Free Rent – in either scenario, most Landlords will offer some amount of full service rent abatement. It’s an easy way to incentivize a tenant while not impacting the building “face rate”. The number of months varies based on the lease term, but generally speaking, it’s safe to assume about 0.5 months of free rent per year of term. Pro tip – consider spreading the free rent over the course of the lease (ie. first month of each calendar year for the first five years of term) to align with periods in your business that are financially burdensome.
In any market, it’s essential to approach the real estate strategy well in advance of the lease expiration. Understanding opportunities and Landlord position 18-24 months prior to expiration will allow a tenant to maintain a position of readiness.