Posted By: Karen AshbyAdvisor
775.825.3330
karen.ashby@svn.com
With vacancy rates at the highest level in years, business owners may find themselves pondering whether now is the time to move their businesses. If your needs have changed, if you are anticipating certain economic or growth changes, or even if your business is “status quo,” current market dynamics in Northern Nevada might make an investigation worthwhile. Why?
Higher vacancy rates create a greater field of options available to you, the tenants. In times of declining economics, with the supply and demand landscape as it is, you are in a position to leverage your space requirements against the market. In addition, landlords’ motivations to lease vacant space has resulted in lower rents, increased rental incentives such as free or concessed rents (some offering as many as 6 months free), and/or higher tenant improvement contributions and increase flexibility in terms. This is true today in all segments of our market, but most particularly in the overly-supplied office market.
An evaluation of available space on the market, as well as an economic analysis of your business and potential moving costs will help you determine if our current market climate could benefit your move. Where and how do you start the process?
Of course, I would highly recommend that you obtain the guidance and counsel of a commercial real estate practitioner. Besides aiding you with your search by offering research and advice, they will listen to your needs and utilize their superior negotiation skills to “land” your best deal. Interestingly, as a tenant in a typical transaction, this service is at no charge to you. Most landlords pay commissions to the procuring Broker, similar to a buyer-representative being compensated by the seller of a house in a residential transaction. This commission structure benefits you, the tenant, as you have a professional to handle the many different facets of the transaction on your behalf, instead of relying on the Landlord’s representative to represent both parties’ interests.
In the interim, you can evaluate the market, to some degree, on your own. Market research and inventories can be researched by searching Commercial Information Exchange websites such as LoopNet and Co-Star. These are, in fact, the exact databases Northern Nevada commercial real estate practitioners themselves use. Listed on these sites, you will find both “direct” and “sub-lease” opportunities. You will also find properties’ available square footages, pictures, floor plans and other details such as asking rents and CAMS or other fees such as “water, sewer and trash” which are paid per square foot. Please know that in this regard that asking rents are a starting point for negotiations. Your commercial agent will be able to suggest to you what rates you are likely to obtain with their assistance.
Regarding economic analyses, now is a great time to anticipate future needs as our leasing climate allows for “more bang for your buck.” Even if you maintain a similarly sized location as you are currently occupying, a move could mean lower rent and less overhead. Be mindful, however, that there will be relocation costs to consider. Consult your IT professional, telecommunications company and be sure to evaluate any tenant improvement needs.
A few notes regarding timing. If you choose a “shell” unit or require tenant improvements, allow 120 – 180 days at a minimum for permitting and construction. Some tenants, depending on the complication of their requirements, may need to start their search a year or more in advance of their projected move date.
This raises another question, which is “How are tenant improvement costs handled?” As mentioned previously, landlords are willing to contribute towards costs, and even more-so in the leasing environment today. The tenant’s portion can either be paid up-front, according to terms, or can be amortized over the term of the lease. The details of these scenarios require negotiation as well. SBA loans are also available. Please keep in mind, however, that motivated landlords will make deals happen.
We’ve discussed the new landlord, but what about your current landlord? Your current landlord does not want you to vacate their building (unless there is an unusual circumstance). Your landlord will likely work with you to retain your tenancy. Reduced rents, rent concessions, fresh paint or new carpet could be strong bargaining points for you in today’s market.
Most landlords will work towards renewing their tenant’s leases 6 months before lease expiration, or longer ahead for larger tenants. Also, many lease documents have an Automatic Extension clause. An Automatic Extension occurs within a specified time before lease expiration. If passed unnoticed by the tenant, and if the tenant does not provide notice to vacate or renegotiate terms, the current lease is extended for a defined period, usually with a given minimum escalation of 3-5%.
Should you decide to remain in your current location, remember that in these days you are in the “driver’s seat.” You have never been in a better position to negotiate rates, term and extension options. Again, your landlord wants to retain you. And, it may be more beneficial for you to remain where you are with terms that better meet your needs.
In closing, we do not know for a certainty how long it will take for all or most of current vacancies to be absorbed by the market. We do know that construction of new facilities has slowed due to the current conditions. And, when vacancy rates decrease, market rents will rebound and landlords’ concessions and provisions will decrease. (You may be able to take advantage of current market conditions even if you are in a current lease. Consult with your real estate advisor to determine sub-lease options that could relieve you of current obligations in order to relocate.)
Now may be the time to move your business. Perhaps making the effort to evaluate the benefits of a move is in order. In either event, our market in Northern Nevada will continue to evolve. Being aware of options and opportunities, tenants are empowered to arrive at decisions that will be of value now and into their future.
Karen Ashby is with Sperry Van Ness as their Leasing Expert providing consulting services for both landlords and tenants. She was formerly the Operations Director for The Ribeiro Companies, overseeing the Property Management Division and Leasing of existing buildings.
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