In  a recent Blog post by James Quinn, a senior director of strategic planning for a major university, the time period of the office space market recovery is questioned and predicted to be much longer than many industry experts predict.  The main reason for his prediction is his belief that consumers are beginning to "Deleverage," spending less, and it will cause major changes in the economy over the next decade.

"They have no choice. Boomers have come to the shocking realization that you can’t get wealthy or retire by borrowing and spending."

His thoughts on the Office Space market:

"The current office vacancy rate of 17.5% is the highest since 1993 and is just below the all-time high 18.7% in 1992. The WSJ has concluded, with no data or analysis, that the vacancy rate has bottomed. As the employment data proves, companies are not hiring employees. New companies are not being formed. Government mandates and regulations regarding healthcare and uncertainty about taxes will keep the formation of new small companies at a minimum. Conglomerates continue to ship jobs overseas. Part 2 of this Depression will drive more companies out of business. Office vacancies will remain at record levels for the next five years."

On the other side the Wall Street Journal came out with an article, Signs of Recovery For Office Market, last week that predicts that the office space market has bottomed out and that we are starting see some stabilization in the market. They also state that the recovery will be a slow one, but don't define how long that could be.

For us at OfficeFinder.com, over the past 3 weeks we have seen a surge in closed deal reporting in the neighborhood of 2 - 3 times over those of the previous several months. These reports come through our network of office space tenant representatives and executive suite members. We are hoping this continues and identifies the start of the small business recovery.

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Maybe the landlord (or his broker) shouldn’t be considered an adversary when negotiating a lease. If you understand their needs and wants you may more likely be able to achieve a win-win for both parties. After all, you are both attempting to get the best deal for your respective side.

Tenants spend a lot of time, some more than others, on clearly defining their needs. They determine the location, size, build-out, cost, image and more. The key to a great deal is making sure what you want is what the particular landlord can deliver. Not all landlords have the same agenda or live by the same rules.

Have you ever been at a casual business lunch, maybe in the gym working hard to shed a few pounds or simply standing in line for that double mocha cappuccino when the guy next to you starts talking about his firm’s latest and greatest real estate deal? You can tell he’s proud of the results. Unfortunately, his knowledge of the deal may likely based on the abbreviated summary presented to him at the last manager or partner meeting. Unfortunately for you he just planted an annoying seed in your head. You stop thinking about anything but the deal your firm just signed and you can’t wait to get to the office to look at your new lease. The fact is, that guy may not have all the correct information and details about his deal but it sure set you off on an aimless journey. You now start to wonder if you really did you get as good a deal as you first thought.

The core of the problem is that no two deals are ever the same -- even in the same building. Although the monthly rents may be within pennies of each other, the deal points may vary across the spectrum. The differences often depend on specific issues known only to the Landlord.  This can include idiosyncrasies of the particular suite, the building or maybe the landlord’s financing. It likely has nothing to do with you. So, don’t take it personally.

Several years ago we assisted a client in leasing a portion of an oddly built suite. The portion they intended to lease worked well for them if the landlord would just put up one wall, re-carpet and repaint the suite. Quick deal…done and done.

At the same time, I had another client looking for space about the size of the remaining portion. However, that section required a lot of improvements to meet most tenants’ needs. When I approached the landlord basically with two deals at the same time they were willing to do well over $45/SF in improvements, a high amount for a small space. From their perspective they were looking at what the cost would have been to do both suites while putting most of the cash into the odd shaped one. The win-win was that both clients got a space built out to their needs while the landlord signed two new tenants with minimal down time or lost rent.

In today’s market the concessions come in all sorts of shapes and forms. Some creative landlords offer reduced rent for the first year while others may offer abated rent. Others are more aggressive on their asking rates. The landlord was quite upfront in one recent renewal transaction we handled. He needed to keep his asking rate at a specific level based on the terms of his loan. With that in mind and knowing the market value as compared to other properties and other new deals recently completed in the same building we put a total dollar package together that would work for the landlord. We then used abated rent spread through the term so the total value of the transaction equaled fair market which worked for my client. The landlord got his rate and the client paid what was fair over the term.

The guy standing in the coffee line telling you about his deal may not even know the specific deal points of the lease and, in particular, how all the moving parts fit to make the deal work.

Every deal starts with a market value.  That’s just the reality of real estate. Beyond the basics every deal has its uniqueness. If you can get answers to some issues it might help such as:

• Does the landlord own the building outright?
• If not, how flexible is his lender? Some lenders need to approve all deals, deals that impact loan to value while another may need approval of deals over a certain size which could impact the landlord’s flexibility.
• Does the owner tend to sell or keep their properties long term?
• How long has the particular suite been empty?
• Is the present build-out considered “standard” or would it require improvements for most any new tenant to occupy the space?

If you look at your business plan and carefully identify your real estate needs you can approach the  landlord with the simple question, “Can you do this?” While the path to “yes” may not be a straight one, understand there are many issues facing the landlord which can allow them flexibility to make your deal or conversely become impediments forcing you to move on to another option. Be strong in your negotiations but also learn to be flexible.

Guest post by our Orange County, Ca Office Space Tenant Representative

In Leasing Medical Office Space - Part 1, we delved into some of the challenges facing medical and healthcare practitioners when leasing office space in which to provide their services to the public. While it’s true that established medical services don’t frequently relocate, more and more practices are opening branch facilities to better service their existing clients and attract new patients.  Today, we’ll look at even more considerations a healthcare provider should consider when wishing to open a new practice, new branch, or relocating their primary office to a new, more convenient location:

After Hours Access: Many healthcare facilities may need to see patients after hours on an emergency basis or may choose to provide extended service hours. Today, many urgent care clinics are choosing 24-hour operations to provide less costly healthcare than provided by hospital emergency rooms. Not all lease language permits extended hours of operation. Also, some office space leases include some or all of the utilities used by the tenant during normal business hours. If operating beyond the traditional 8 am to 5 pm service window, the lease language will need to include an agreement about exactly which party pays what portion of the utilities so that special requirements are taken into account.

Landlord Access: In most office space leases, the landlord retains the right to enter the premises at any time whatsoever in order to inspect their property or show that property to realtors or other parties at the landlord’s discretion. Medical practices of all types all under special privacy acts which require that patient identify be protected at all costs. This means that the landlord or owner simply can’t be allowed completely, open access during the hours of operation. Of course, the landlord can expect reasonable cooperation through appointments or specific hours of access, but simply opening the door to each room in the facility at any time would be a clear violation of patient privacy. This requires extremely sensitive and clear lease language in order to ensure the interests of both the landlord or owner and the medical tenant are sufficiently considered and provided for in the lease agreement.

Exclusive Use Provision: When leasing office space in a suburban area, it is important that a competing healthcare facility providing the exact same services not be allowed to move into the same building or strip of property as your practice. Ask for a provision in the lease language which prevents the landlord leasing another space in the same building to a healthcare provider operating a competitive practice. This may require some very creative lease language because you might well want another healthcare provider that offers complimentary services to reside near your practice but you want to avoid direct competition.

Obtain a Qualified Lease Broker: When beginning your search for medical or health services office space, locate a licensed lease broker with medical office and facilities experience. These brokers understand the nuances unique to medical office space leasing and the negotiations required between landlord/owner and medical tenant such as tenant finish, ADA compliance, and can negotiate the best possible lease agreement for your practice.

Leasing Medical Office Space - Part 1

Failure to understand all the office leasing costs

There are more costs involved in leasing office space than just the rent.  Many of these costs are quoted in different fashions so it can all get quite complicated when comparing alternatives. It becomes difficult to compare proposals on an apple-to-apples basis. In fact, it can even become difficult for an inexperienced tenant representative to decipher the various costs involved in comparing different office space alternatives.

First of all, there are different lease types including full service, gross, semi-gross, net, triple net and other variations which specify which, if any, expenses the tenant pays.

How about the base year for operating expense pass throughs? This is the base year amount of operating expenses that your additional costs are based on. If you don’t pay attention or don’t know you could find yourself liable to pay for increases over a base year that could be 5 year old and cost you several dollars per square foot right off the bat. What if the building is only 25% occupied? Who will pay for the operating expenses on the vacant space? What is the norm for your market?

If your lease is a triple net lease are the expenses in line with what could be considered normal in your market or are they somehow higher due to extra landlord fees?

There are also different levels of tenant improvements which can be included in the lease. Landlords will very often offer a per square foot allowance for tenant improvements. Is this on the net rentable space or usable area or is it from shell condition or below the ceiling?

Another big one could be the load factor in calculating useable vs. rentable space measurement. It is the percentage of space on a floor that is not usable plus a pro-rata share of the building common area, expressed as a percent of Usable Area. It is also known as the Common Area Factor or the Loss Factor. A Typical load factor range is 10% to 18%. Some inefficient buildings can have load factors as high as 25% or more. Once again, what is the norm in your market?

The answers to these questions can make a significant difference in the overall cost of renting office space. Which is why making mistake number one in this series can be so damaging. Understanding all of the leasing costs and being able to communicate that information to you is an important part of what a tenant representative does. It can save you thousands of dollars in avoiding mistakes. Tenant representatives provide many more services to their clients and there is no cost to you in engaging their services. It costs you nothing, but can save you thousands.

Biggest Mistake Made By Tenants
Second Biggest Mistake Made By Tenants

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The second biggest mistake made by tenants looking for office space is not allowing enough time for the process.  Far too often tenants will not get started early enough and have to settle for less than they could have had otherwise. This applies to tenants who are looking for conventional space and not executive suite, virtual office space, or co-working space. Typically a tenant can be in these spaces as soon as the next day or at least within the month.

Tenants looking for conventional office space under 10,000 should get started at least 6 months prior to their move in date. This will allow enough time to find some good alternatives, negotiate the best deal and have any tenant improvements completed for an on time move-in. This is true even in a soft market. In fact, even more so since there will be many more possibilities to investigate.

For office tenants over 10,000 square feet, at least 9 months should be allowed.  The larger the tenant, the more complicated the process and more time is needed.

For more information on the office leasing process and timing, visit our Office Leasing Process Schedule.

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