When the economy and job growth are down in certain areas that typically means that there is more vacant office space available. In an effort to lease office space during a market like this landlords have more competition between them and typically offer more lease concessions such as tenant improvement dollars, lower lease rates, and offer shorter lease terms (e.g. 1-3 years).
In a strong economy like Austin, Tx. as the employment rate increases office space vacancy rates typically decrease (meaning there is not much space available). This creates a landlords’ market which means because office space supply is low they are able to increase their lease rates, offer fewer concessions, and require longer lease terms (e.g. 5 years or more).
Longer lease terms don’t resonate with a lot of companies, especially startups because in a world where business cycles are more volatile shorter lease terms provide more flexibility to react to changing business conditions.
So what options to business owners and companies have to create more flexibility in their office lease when landlords are requiring them to sign long term leases of 5-7 years or longer?
- Assignment & Sublease Options– Business conditions can change. Make sure that you structure an assignment or sublease option that gives you the ability to dispose of your space if needed. Maybe your company expanded sooner than you thought and you need more space however it’s not available in your building? If this is the case you must relocate. Having a sublease option gives you the ability to find someone else to lease your space. If you plan on getting acquired you want to make sure your assignment options is structured in a way to give you the most flexibility.
- Termination Option – This would give you the right to terminate your lease prior to the lease expiration. Landlords don’t typically like this however if you give them enough notice in advance and pay any unamortized costs (e.g. tenant improvements, commissions, etc.) they may agree to this.
- Contraction Option – You never know what will happen in your business. If you need to downsize at any point having a contraction option will give you the ability to give back some space before your lease expires.
- Expansion Option – If you are a growing company and anticipating adding headcount you will want to negotiate an expansion option in your lease. There are several ways to do this however basically you want to secure the right to lease any available contiguous or noncontiguous space that is available when you need it.
- Must-Take – Tenant has a certain time period in which they must expand into the additional space
- Right of First Offer – If any space becomes available in the office building the landlord must offer it to you before anyone else.
- Right of First Refusal – This allows the landlord to market available space however if they agree to terms with any other prospective tenant they must give you the option to take the deal first. If you are interested in taking the space you must do so at the same rate and terms agreed upon with the other tenant.
If you are unsure of your business whether you might grow to fast or grow slower than you think it’s important that you negotiate some flexibility in your lease. Especially when market conditions create a landlord’s market where they are requiring that you sign a longer lease than you are comfortable with.