The length of your office space lease term is a negotiable item however it depends on a number of factors such as market conditions in your city, the cost of tenant improvements, or simply the landlord’s preference.
At the end of the day you, the tenant, have to determine what is right for you. Negotiate the office lease term based on your needs and risk tolerance.
If you are a startup and unsure of where the business is going then only talk to landlords that will do a shorter term lease (less than 3 years). You won’t be able to have much leverage during negotiations to get tenant improvement allowances, free rent, etc, however you will mitigate your risks. If your company is more established then you should consider a longer lease so that you can win more concessions at the negotiating table.
When we talk about short term leases we mean office lease terms less than 3 years. 1-2 years is the norm.
Longer lease terms are considered to be 3-5 years or longer.
Below we discuss some of the factors involved in determining how long your office lease term will have to be.
Office Space Market Conditions
If you live in a city where there is extremely low office space vacancy (e.g. Austin, Tx) you are in what’s called a landlord’s market. Deal points can still be negotiated however if the landlord has a lot of interest from other parties they have more leverage in the negotiations and will likely require a minimum of 3-5 year leases. In some cases even longer.
This is especially true if it’s one of the more popular buildings or locations. Landlord’s prefer longer leases as it makes their investment more stable so if they have leverage they will do whatever it takes to lock in a longer lease.
In some cases, regardless of market conditions, the landlord just won’t budge on office leases shorter than 3 years. It doesn’t matter if they have had a space vacant for 6 months. You see if a multi-tenant building is mostly occupied (e.g. 85%) and the landlord is still profitable they don’t have any reason to offer a shorter lease. Unlike a single house that sits vacant for 6 months office landlords are still making money.
In some cases it just comes down to the landlord’s preference and risk tolerance. They take the chance of passing on a shorter lease hoping that another tenant comes along willing to do a 3-5 year lease.
Cost of Tenant Improvements
When leasing office space you typically negotiate for the landlord to give you a tenant improvement allowance (TIA) as part of the deal. The more TIA they give you the longer the office lease term they are going to require.
The reason is that they need time to amortize the costs over the term. It wouldn’t make sense for them to give you $24,000 TIA for a 12 month lease that only generated $1,000 per month in rent would it? They are in the business to make money so they need enough time to spread out the lease costs and ensure they are profitable.
Alternatively maybe you, the tenant came out of pocket $50,000 above and beyond the TIA the landlord gave you. In that case you would probably want to sign a 3-5 year lease, or longer to ensure that you recoup your cost.