The number one question we get is “How’s the real estate market?” The answer is it depends. I know what you’re thinking, “An article about real estate, but was I just in the middle of watching paint dry and then going to read my life insurance policy.” Don’t worry I will try and keep it interesting. The true answer to the market question is “it depends…on who you are.” Are you the landlord who has full buildings with tenants that pay on time? Are you the tenant who is taking advantage of depressed rental rates and upgrading your space while lowering your lease liability? Then there is the other end of spectrum. Maybe you are the landlord with 0% occupancy fending off the banking wolves at your door. Lastly, maybe you’re a tenant that is paying over-inflated rental rates just hanging on every month because you signed a lease a few years ago when things were better. We are going to focus on the latter.
In the not too distant past, sales came from the sky, banks were lending and real estate was hot! Just like waking up with a hangover, we are now asking ourselves What happened?
For most companies, your real estate cost is typically the second largest expense after payroll. It is rare that the amount of square footage, the rate you are paying or the term you have left on your lease is exactly what you need at any given moment. You should examine your lease commitment annually or semi-annually. You should also meet with your real estate broker about what market trends they are seeing and how to act or react.
Here are some quick facts on the commercial office market. Nationally, the office vacancy rate is 12.5% and in the Philadelphia market area it is 11.6%. These rates have both decreased from last quarter. Philadelphia, overall, is a stronger market and the vacancy rate consistently comes in lower than the national average. Taking that into account, the stronger the demand for space the less flexible building owners can be. The Philadelphia suburban market is a great place to locate your business, but what if you are in an expensive real estate situation that jeopardizes your existence?
If you are looking to save costs immediately and don’t have time for your next lease expiration, meet with your agent or broker and discuss these ideas:
- Reduce your foot print. No, I am not talking about carbon. If you can give space back (square footage) to your landlord, do it. The landlord will typically do this if you are leaving them with a usable, rentable, marketable piece of property.
- Ask the landlord for a temporary reprieve or reduced rent. As long as the landlord knows they can make it up in long run they should try to accommodate you for a few months to a year to keep your tenancy
- Blend and extend. If you like your space but got into the lease a few years ago at the top of the market and you have 2 or 3 years left on the lease, look at renewing early. By renewing your lease early you can get today’s price per square foot as an immediate reduction. The trade off is that you typically need to commit to an additional 3 or 5 years on top the time you have left.
- Sublease your space or feel free to cohabitate. If your space is divisible and it is permitted by the landlord offer your space for sublease. This can be all or some of your space and typically needs to be at a steep 50% to 70% discount on the rate you are paying. This will defray some cost not solve the entire problem.
If your lease is coming up within the next 18 to 24 months and you’re comfortable with it, pursue a flight to quality. Prices per square foot for some office space are at all time lows. A flight to quality is moving up the building Class chain. This is moving from a Class B or Class C building to a Class A building for little or no increase to what you currently paying. If you do, you are in good company. Here are some companies in 2011 that recognized the rates bottoming and have recently taken advantage of the market by moving into large blocks of space in Montgomery County:
Quest Diagnostics leased 136,919sf Valley Forge
Broadview Networks leased 57,209 sf King of Prussia
Brokers Concept leased 43,000sf Blue Bell
PJM Interconnection leased 105,861sf Valley Forge
Academy in Manayunk leased 61,483sf Conshohocken
LarsonAllen LLP leased 28,880sf Plymouth Meeting
SKF, Inc. leased 112,305sf Kulpsville
Centurion Medical Products leased 97,200sf Harleysville
Your office real estate lease can be one of the most expensive commitments a company can make. Make sure you consult with your commercial real estate expert to make the informed choices. Until next time, don’t work for your space. Make your space work for you.