Tips to Consider Before Signing your Next Office Lease
Cresa's Alex Coe on creating a real estate strategy to facilitate a company's business goals.
Despite businesses and markets across the country indicating strong signs of returning to the office, and limiting remote work practices, the demand for office space has not yet rebounded to the levels of recent years.
For the Dallas-Fort Worth market, construction of new inventory continues to trend upward – affecting both the increase of vacant supply and available space.
Office sublease space also continues to be added to the market. From an occupier’s perspective, trends suggest that the next several months will be a prime opportunity for office tenants to take advantage of the commercial real estate market; strike new deals; renegotiate current lease terms; or begin a renewal process.
Before diving into a conversation with a landlord, it’s important to consult with a trusted commercial real estate advisor in order to make certain that your real estate planning is helping to facilitate your business strategy. As companies emerge from the challenges presented by the pandemic, it is important to stress the need to consider a variety of factors and services that could affect your business’ bottom-line. Perhaps now may be the optimal time to leverage the market and right-size your square-footage, all while working to future-proof your commercial real estate planning.
Return to Office & Workplace Strategy
It is a great time to begin conversations about right-sizing your local office space as well as a national portfolio. In a recent letter to JP Morgan Chase shareholders, CEO Jamie Dimon stated that “For every 100 employees, we may need seats for only 60 on average.” Conversations with a workplace strategist can advise on the decisions about why and how a company returns to the office.
Offices are seeing a diverse system of hybrid workplaces that emphasize both in-person and remote work. Technology, accessibility, and customization, with an emphasis on health and wellness, are playing key roles in defining how workplaces function. Every business’ approach will be different—unique cultures require unique solutions with flexibility being key.
Market Watch: Supply, Rents & Concession Packages
Over the last ten years, the demand for office space throughout DFW has surged, resulting in new construction deliveries, renovated properties, and overall supply increasing to meet the demand. However, at the end of Q1 2021, the total office space availability rate across DFW reached 20.9 percent, resulting in over 85 million square feet of available office space with approximately 9.3 MSF being available as sublease space.
Reports and studies have found that there is a real-time opportunity to negotiate rates as much as 8 to 12 percent below the marketed rate before obtaining a healthy concession package. Regarding the build-out of space and capital expenditures, perhaps now more than ever is the best opportunity to get space delivered “turn-key.”
With the cost of materials increasing over the past year, the responsibility of turn-key conditions will be on the landlord to deliver the space on time and on budget. As concession packages go, there has been about a 15 to 20 percent increase in earning Tenant Improvement Allowance or Turn-Key space. Free rent concessions have seen general increases of 25 to 40 percent on five-year terms.
Lease Language: Options & Clauses
Besides implementing a flexible workplace strategy and monitoring the market, it’s also important to maintain flexible options in your lease language and negotiations. Throughout 2020, clauses and options within leases were carefully examined across various businesses and industry types to learn if the impacts of the global pandemic would be covered in the lease to provide assistance or even excuse tenants from meeting contractual obligations. Moving forward, many office tenants are working to future proof their lease language to ensure they are protected from next the financial impact and/or next force majeure event.
- Force Majeure Clause: A force majeure clause is a contractual provision that seeks to (a) allocate among the parties the risk of certain events that are beyond their control and (b) mitigate the negative effects of such events. Typical events include acts of God; floods, fires, earthquakes, epidemics, or explosions; war, invasions, and acts of terror; as well as government law or national emergencies.
- Termination Rights: During this current market climate, landlords may be susceptible and willing to provide tenants the opportunity to insert termination rights into your lease language. Only you should decide potentially how long your space will work for you and a company should be able to maintain real estate flexibility.
- Right of First Refusal: This lease clause gives an existing tenant the first opportunity to lease contiguous space that is currently vacant or might become available when another tenant vacates a space within the property. In previous years, unfortunately, tenants would be on defense and, at times, coerced to take the right of first refusal space as extra space – “Just in Case” Instances such as this prove that having a professional advocate at your side can help tenants avoid taking unnecessary additional space and unnecessary liabilities.
- Security Deposit: Depending on your size, credit strategy, and term, there could be an argument to forego the deposit or have it utilized toward your business needs.
Forensic Lease Audit Services
If you just signed a lease or if it’s too early to discuss a renewal or relocation strategy, there’s still an opportunity to incur savings by having your lease examined by a trained forensic lease audit professional. According to BOMA International, “75 percent of escalation invoices contain errors, which can lead to disputes.”
Additionally, building owners have strategically repositioned their approach to operating expense pass-throughs during the global pandemic. The need to thoroughly plan for and audit upcoming operating expense bills can help ensure your expense pass-throughs are being administered as your lease dictates.
Auditing a lease can offer tenants the opportunity to identify errors and recover overcharges. Operating expense exclusions, incorrect accounting methodology, calendar vs. fiscal year taxes, and incorrect sublandlord billings are examples of common errors that can have an impact on a tenant’s business.
Regardless of if your lease expiration is over 24 months away, the time to talk is now. No conversations are off the table. There is potential to lock in future business terms that best suit your real estate strategy as well as future-proof your strategic business planning. Workforces are back in the office throughout north Texas and businesses are re-establishing collaborative cultures that were encumbered by the pandemic.
As we move forward in 2021, businesses should partner with a commercial real estate professional who is not conflicted in the market, who can identify opportunities and negotiate terms based on what works best for their financial reporting: What drives your business objectives? Where does your workforce need to be? What design features help you work better? From there, a real estate strategy can be created to facilitate your business goals.