The commercial real estate industry is in one of the hottest markets we have seen in years, with the state average GDP growth of 3.4 percent in 2018 and a 3.2-percent increase forecast for the rest of 2019. Vacancy rates for industrial and office spaces are dropping as employment gains drive up the demand.
Healthy office vacancies for both landlord and tenant hover around 12–14 percent, according to Costar. Additional analytics from Costar forecasts all office submarkets are positioned to dip below the 12-percent vacancy rate. This means demand for office will be high and tenants can anticipate rental increases since there isn’t a lot of office product to choose from.
Yet amid the huge growth, industry experts issue pleas of caution. As companies eye their balance sheets for room for more overhead costs — or to shed some overhead — it’s more important than ever for businesses to be cautious and work with experts who know how to help, especially in this low vacancy market where many landlords have the upper hand. With increases in out-of-state office investment purchases comes landlord-savvy negotiations and possible nightmare scenarios. Unfortunately, many companies deal with a variety of horror stories when trying to buy or lease commercial real estate.
The owner of Paradise Village Chiropractic, Health and Weight Loss Program renewed his lease on his own without the aid of a seasoned tenant rep. As soon as he signed, he was paying twice the going rate for commercial space in nearby complexes. “The nightmare began when the landlord was selling the building and I only had a few weeks to make a decision whether to stay or go. I felt pressured to make a decision, so I signed the lease. Renegotiating leases is just not what I do as a doctor,” says Dr. Scott Carmachel.
Dr. Carmachel is, unfortunately, not alone when it comes to every day shrewd landlords. Unfortunately, many new business owners have trouble dealing with lease negotiations. Maid Right owner Angela Clayton signed a five-year lease not knowing the building was about to be sold. Says Clayton, “The new landlord was desperate for tenants. He let almost anyone lease the property. The space next to me had someone sleeping in the building overnight. The restrooms weren’t cleaned, the repairs didn’t happen, and the neighbors made us so nervous that we didn’t want to leave after dark.”
Today is a totally different experience for Maid Right. They worked with a professional commercial real estate agent who identified several properties and was able to find a new space for the business.
With the strong commercial real estate market, those leasing need to be extra vigilant when working with landlords and negotiating transactions. Working with a broker can help obtain the best rate and terms possible. The best part is that the landlords pay the fee. It really is no cost to the business owner and provides peace of mind.
Lease Negotiation Tips
- The following are tips to consider when it comes to renegotiating a lease:
- Find out what the landlord’s objective is with the building.
- Your lease determines your future relationship with your landlord. Make sure you understand it and it is written so that you can live with it.
- Make a note on your calendar six months in advance of the lease expiration date so there is time to negotiate the current lease and discover what the market has to offer for other options.
- Start the lease renewal process as early as possible to allow for research and delays. Most medical businesses, dentists, chiropractors, naturopaths, etc. lose 10 to 20 percent of their business, if they relocate further than a mile from their established location.
- A web search for commercial space will reveal asking lease rates. This provides the tenant with the going lease rate for their product type such as office, retail or industrial in their area of town.
- Everything is negotiable.
Andrea Davis is the principal of Andrea Davis CRE. Her brokerage career began in 1997. Since then, Davis has closed more than $220 million-worth of transactions, totaling more than 1.5 million square feet. She is diverse in all aspects of commercial real estate, working with landlords, tenants, sellers and buyers with office, industrial and/or retail requirements.