How do you solve a problem like a lease term in the middle of a pandemic?

15

Most businesses sign leases for many years to house their operations. There are good reasons for it: rent stability, landlord contribution toward tenant improvements and it takes considerable time and effort to find a new location and move.

But what happens when you’re hit with a pandemic that limits your ability to use the space you spend 5%-8% of your revenue on?

With a typical lease term of five years, there’s a decent chance a discussion about leased space is going to come up while we’re all dealing with the “new norm.” So, what does one do? There are options, opportunities and potential relief.

Kick the can down the road: The most common path right now for corporate users is to negotiate a short-term renewal with their existing landlord. There’s some sense to this. We don’t know what the world will look like in six months, let alone 12 or 120 months. It’s a safe play for corporate decision-makers.

Reduce footprint: If your lease term is coming up and your business has experienced success working from home or your business is in a downcycle, simply looking for a smaller alternative space that either matches the new physical space need or matches a reasonable rent to revenue ratio of the business’ new reality can make sense.

Sublease: Just about every week, there are new sublease opportunities available. While the business offering the sublease is most typically still responsible for the lease obligations, having a subtenant can help mitigate the financial component of those obligations.

Blend and extend: As a general rule, banks and landlords like longer-term leases over shorter-term leases. If a business’ lease is set to expire 12-36 months out, it may be able to negotiate a more favorable rental rate or other terms by adding additional term to its lease commitment.

Go big: Be the contrarian and go big. While others are going short, go long. Knowing shorter term is more the norm right now and that landlords typically want longer term, some landlords may be extra willing to increase components that make a lease more attractive to a business for a longer term. These could be reduced rental rate, months of rental abatement, increased tenant improvement allowance or other terms.

Go big 2.0: Another version of going big is to upgrade the space your business leases. Landlords are getting hungrier for tenants and lease rates are likely to drop. While there hasn’t been much of this yet in our market, it’s happening in primary markets, which are leading indicators for us here.

It is completely cliché to say it, but we are truly living in unprecedented times. It’s difficult to make sound decisions when “stability” and “normal” are now most commonly used in either past or future tense. There are options for relief and potential opportunity if the right strategies can be employed.

Facebook Comments