Dec 19, 2013

Using Your Lease Renewal as an Opportunity to Reduce Occupancy Costs

By Don Catalano

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Your company's office space is probably ripe for redesign and refreshing. Changes in the nature of work coupled with different preferences among the Generation Y work force are changing the nature of offices. While these changes are causing tenants to rethink their space, they're also leaving landlords with excess inventory that can make them more willing to do what it takes to hold on to tenants. These two factors together give you an excellent opportunity to use your renewal to significantly reduce occupancy cost. 

 

Changing Your Office

The old model of an office is obsolete. Older spaces are typically designed as a mix of offices and cubicles with limited spaces for conferences or meetings. They were designed to have a single worker occupy a set space every day and have additional space to accommodate new workers as the company grows. Occupancy cost was directly related to headcount since every additional worker created an additional demand for space.  

In the modern workplace, roles are much more fluid, necessitating an equally flexible workplace. Generation Y workers frequently form collaborative teams. While those teams don't fit in a single worker's cubicle, they also don't need a gigantic conference room. Instead, they usually work best in a small meeting room or, in many cases, an open and creative space (like in the image below.)

Workers are also much less likely to be in the office. Some work from the field or travel regularly to support far-flung locations. Others split their time between working from home and in the office. The net effect is that many offices operate well below their original headcount at any given time. 

Spaces that reflect these new realities have two key differences, both of which help to reduce occupancy cost. First, they are usually smaller, reflecting the fact that many workers don't need a dedicated, private space. Second, they are usually built out to a different standard with more open floorplans and with more small-to-midsized common space for teams. When done with an eye towards cost control, these spaces can be much less expensive to build out and require fewer changes when headcounts rise.

Changing Lease Negotiations

Given that your company probably needs a space that is both smaller and completely new, your negotiating position opens up. Instead of looking for a good deal on a renewal in your existing space, you might find it easier to move to a new space that is both better sized and that can be custom-configured to your new needs. This allows you to do a detailed occupancy cost analysis of all of the buildings in your market to find the ones that are best suited.

 

It might seem like this new market could create opportunity for landlords. In some cases it does, since a landlord that isn't saddled with existing large and heavily built-out spaces might be able to better economically serve this new type of demand. However, even this type of landlord are getting pinched by the second part of the new nature of tenant demand. Since tenants are using less space and office-using job creation remains tepid at best, this is creating large pockets of vacancy. 

 

With high vacancy and no prospects of significant job growth on the horizon, the market is a perfect storm for landlords. This allows qualified tenants to negotiate aggressively for both an attractive rent and a TI allowance that stretches further in this age of minimal buildouts. The net result is a space that is better suited to your business and has a lower occupancy cost. 

 

Other articles to check out:

6 Ways to Reduce Occupancy Costs

Commercial Lease Extension Clause Tips

Commercial Lease Renewal Myths... Busted!

 

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Topics: Occupancy Cost

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Don Catalano

Don Catalano

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