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Entries Tagged as 'Office Leasing Tips'

Employee Office Space Allocation is Shrinking

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According to Buildings Magazine reporting on a recent IFMA study, the  allocation of office space per employee is shrinking thanks to new technology, cost saving efforts and cultural changes in the way business is done to satisfy a younger workforce. The chart shows  the the average square feet per employee based upon job position.

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Office Leasing Tips , Office Space Design

Profits and Pitfalls of Subleasing

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The article below is one that I wrote in February 1993.  I found it interesting that it still holds true not only for the Seattle are, but most office markets, too.

Almost 20 percent of the vacant office space in Bellevue and Seattle is available for sublease. Massive corporate restructuring, downsizing and mergers mean that many Puget Sound firms need less space than anticipated. Yet they find themselves locked into expensive long-term leases. It makes a lot of sense to find a way to recoup on space that would otherwise stand empty.

Even at 20 percent, sublease space in the market is underestimated. When any space is vacant or is soon to be available due to a pending move, it is included in our vacancy rate analysis. But often sublease opportunities are poorly marketed and publicized. Space with less than one year remaining in the lease is often not marketed at all. So tenants willing and able to relocate and go through the complications of a sublease transaction will find plenty of attractive possibilities around town.

"Attractive" is not a word you would hear from building owners, who often view subleases as bad news. Rates are typically at least 15 percent lower than direct leases. An owner therefore finds himself competing with existing tenants for new tenants. It's an uphill battle, because the landlord is usually at an economical disadvantage.

Rental rates for sublease space in some of the newest buildings in downtown Seattle, for example, can run as little as $12 per square foot, complete with full service. This is a whopping one-third savings over the average downtown rate of $18 for similar office facilities.

Garth Olsen of Cushman & Wakefield, leasing agent for the remaining 100,000 square feet of AT&T sublease space in the AT&T Gateway Tower downtown, says that his firm is asking between $14 and $15 per square foot. This includes a generous tenant improvement allowance with a lease that runs through the year 2000.

On the other hand, the landlord has a starting price of $18 per square foot. The building is only 54 percent full after two and a half years. Having to compete against your major tenants to lease space adds insult to injury.

Getting a Good Deal

Despite the obvious economic benefits, there are some challenges in negotiating a wise sublease. If costs were equal, it would be more desirable to deal directly with a landlord than to sublease, since there are fewer risks and complications involved. Direct lease space negotiations are two-way between landlord and tenant. In a sublease arrangement, however, transactions become three-way, with all the inherent pitfalls of any triangulated relationship. "In most leases, the original tenant is still ultimately liable for rental payments, even after the space has been subleased," said Craig Michalak, a prominent Eastside broker. "If the subtenant pays less than the face rate of the original lease, the original tenant must make up the difference." He points out that the subtenant, in turn, needs to be concerned with the financial stability of the original tenant. The subtenant may find themselves stuck making overage rental payments, or could end up with default problems that cannot easily be cures. In a worst-case scenario, they could be forced to move.

For companies like the Hogan Company, a Bellevue communications firm, subleasing 7,800 square feet of office space for the past three years has been a good decision. "I looked at everything available that was the right size for us," said Walter Hogan, president. "My final decision was based on cost. We were able to move into our space as is, and saved more than 20 percent over doing a direct deal. I'm very pleased with how everything worked out, and highly recommend a similar arrangement to others."

Hogan was lucky. It's unlikely that the layout and site of an office will exactly match a new tenant's needs, especially in offices greater than 5,000 square feet. When the space can't be used as is, an appropriate allowance for tenant improvements needs to be included in the sublease. Otherwise, the 'financial benefits of a reduced rental can quickly vanish. A typical downtown tenant improvement allowance is around $25 per square foot. Using a 10 percent annual interest rate over a five-year lease amortizes to $6.37 per square foot per year in rent. In other words, more than $6 of each rental payment goes to help the landlord payoff tenant improvements. When the remaining term is less than three years, these expenditures can cause the effective rental cost to increase significantly if the tenant has to foot the bill. What seemed at first glance to be a good deal becomes a very expensive proposition.

Remaining terms of less than two years are the norm for sublease space. But spaces offered by major users often have remaining terms and expansion options that reach well into the next century. In these cases, it's worthwhile to calculate very carefully the pros and cons of various tenant improvement options. Long-term subleases can make sense even when the subtenant ends up paying for improvements. When improvements are amortized over many years, the results of a sublease can become much more beneficial than anything that could have been obtained directly through the landlord.

Two of the larger companies in town with large amounts of sublease space available are AT&T, with 100,000 square feet, and Seattle First National Bank's Security Pacific Bank space, with 200,000 square feet. AT&T's space became available due to a reorganization of the company's work force. SeaFirst's space is the result of their well-publicized merger with Security Pacific Bank. Both leases have a long time to run...;, about seven and a half years for AT&T, and about 25 years for the bank. In SeaFirst's case, there is little probability of finding firms willing to commit for a quarter of a century. So they can be expected to be flexible on the length of term for subleases.
SeaFirst is in the process of finalizing their leasing strategy and selecting a leasing representative. They have already done well, subleasing 150,000 square feet of their original 350,000 square feet to West One Bank and other smaller subtenants. SeaFirst views their property more as owned than as leased. They have therefore decided not to disrupt the market by undercutting prices for competitive space. In other words, they are taking a long-term ownership approach, rather than opting for a quick fix that could result in both hard feelings and financial drawbacks in the long run.

Outstanding opportunities await any business owner willing to consider subleasing space. But risks are certainly present too. Anyone interested in investigating subleased property would be wise to consult a real estate professional as well as an attorney; to make sure that the deal is really as good as it looks.

Office Leasing Tips , Office Rental , Office Space , Office Space Negotiations , Sublease Office Space

What does a Tenant Rep do?

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The following is from our OfficeFinder LinkedIn group discussion on the most importnat activities Tenant Reps provide their clients on addition to just finding space:

boston tenant repI believe the top Time & Money saving services that we provide to clients all revolve around the Transfer of Specialized Knowledge to the client, so that they may make the most informed decision. Up to date market information, understanding the players involved, defining and executing the process required for a successful outcome and most importantly, proactive advocacy, each individually represents significant savings for a client.
Mike in Boston

 

Tenant RepAvoiding mistakes is another important aspect of why tenant representation is so important for office tenants. We do this every day, just like the landlords and listing agents. Tenants only search and negotiate for office space every few years. Landlords and listing agents love to see tenants coming unrepresented. It makes their business much more profitable than when a tenant is represented by experienced and knowledgeable tenant reps...like the ones we have at OfficeFinder!
Jim - OfficeFinder Founder

 

St louis Tenant Rep We provide lease digests and early reminders of important dates i.e. rights and renewal options. We also place these dates on an earlier call up internally so that we remind the tenant that they need to be addressing their real estate needs, even if their intent is to renew. We also assist with renewals. In today’s market the lease signed five years ago is most likely far above today’s market rates.

A 10% discount off of today's asking rate may sound good however, the market may be giving a 25% discount. Only through the use of their own broker can a tenant gain an accurate opinion of today’s market.

Any business who leases office, retail or industrial space expiring within the next 6 to 18 months should be talking with a broker to represent their interests. This not only pertains to renewals subject to negotiation but also pre-stated rent renewals. This is also a good time to negotiate terms and conditions not included in the original lease.

We have a good system in place and when started at the right time in the renewal process, we have been successful in leveraging our position, procuring rent reductions and changes in other terms beneficial to the tenant. We've also been able to facilitate early renewals where the tenant benefits from the negotiated terms and conditions sooner than later.

Lynn in St Louis

Orange county Office Tenant repThere is no question as a tenant representative we can all save our clients real money in the transaction and "time" money by not only doing things they would have to do but also the fact we know what to look for in the first place.

We might want to consider the money we can save clients by handling non-transactional issues after the lease is signed. Two examples: 1) client is a 501C-3 teaching museum- eligible for property tax relief. Worked with county and LL-client received over $100K in refunds over 12 years. 2)Client located in Enterprise Zone. Another client/accounting firm specializes in that area of tax. Put them together...anticipate over $500K in saving over next 6 years. There's a lot more we can do than just focus on the transaction. Just my $.02 :)
Jerry in Orange County, Ca

Office Leasing Tips , Office Space Negotiations , Tenant Representation

Getting a Better Deal by Understanding Your Adversary

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MOrange County Tenant Repaybe 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

Lease Negotiations , Office Leasing Tips , Office Space Negotiations , Orange County Office Space

Leasing Medical Office Space - Part 2

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Moved to Medical Office Space

Lease Negotiations , Medical Office Space , Office Leasing Tips , Office Space Negotiations