Weathering the Affordable Office Crisis
The growing tension between landlords and small business owners was recently featured in an article titled Small businesses ask city for help with landlords. With record high commercial office rents, averaging $32.55 per SF in Downtown Portland, landlord favorable leasing terms have become a problem that is all too common.
For years we’ve seen and heard the stories of the affordable housing crisis. But, the crisis of increasing rents isn’t limited to residential and multifamily properties. It impacts all rents, including office, retail and industrial. Just as low-income residents are being priced out of Portland, small business and non-profits are soon to follow. With vacancy rates reaching 10 percent, the typical forces of supply and demand are not reflected in the rates tenants are paying.
As a tenant, it is important to know your lease terms and your rights. Real estate is a tool that should be working for your business. It should go beyond operational needs to enhance workplace culture, help attract and retain talent and most importantly, to drive profitability. Small businesses/organizations often have the least room for error and it’s these very groups, lacking the support of legal and real estate teams, that are impacted most by unfavorable lease terms.
Businesses in this situation have two basic options. (1) Change your lease. It’s a common misconception that a lease is a static document. If it’s not working for you and your business, it’s time to make a change. (2) Move.
As a Tenant, here is what you should keep in mind:
1. Lease Audits…What are they?
Lease audits are typically performed to identify and correct landlord billing errors. It is a process of examining everything associated with a lease, including the base rent, operating expenses, the measurement of space, maintenance charges, real estate taxes, the interpretation of the lease language and more. BOMA (Building Owners and Managers International) has indicated that over 75 percent of escalation invoices contain errors. Many landlord invoices require further review and can uncover savings to the tenant.
2. Timing is Important
Whether you plan to stay or go, timing is critical when considering a lease audit or renewal/relocation. Landlord invoices should be carefully reviewed monthly, with a thorough lease audit, annually. Most operating expense and tax reconciliations are provided by Landlords during the first quarter of the following year, so it’s critical to review in detail those reconciliations, in comparison with lease language and rights. This diligent and prudent process can provide tremendously valuable for small, medium and large tenants alike.
Tenants should begin reviewing their lease options 12 to 18 months prior to the lease expiration or preferred move-in date, this can help create leverage in a renewal negotiation and ensure you review all available opportunities for your company.
3. Consider Rightsizing
You may be wasting money on unused square footage and you’re not alone. Studies conducted by Knoll report that nearly 50 percent of office space goes unused throughout the day. As rental rates continue to rise, companies must approach space planning with efficiency in mind. Consider how your current space is being utilized. If your business is paying for unused space consider what we like to call “rightsizing” by offering flexible workspace options such as desk sharing, repurposing the square footage of private offices and offering more informal impromptu meeting spaces. Office space used efficiently can not only save you money on rent, but it can even increase productivity and enhance collaboration and communication.
Even if you do not intend to move there are ways that you can alter your lease to save money. Whether it’s through an audit, use of efficient space planning, subleasing or if the timing is right, though a renegotiation. Real estate is a business tool. Make sure it’s working in your best interest.
For the above reasons, we recommend connecting with a trusted advisor/partner to guide your company through the process, whether that be Cresa or another partner that can provide the fiduciary diligence to produce results.