6 Steps To Using The Commercial Real Estate Bubble To Your Advantage

I’ve been working on a novel for longer than I care to admit. Having finished it some time ago, I have finally started the re-write.

Every writer has a process that is natural to them. Mine, I have leaned, requires I first place the location of each chapter before my characters start to do anything. I read somewhere that character + location = plot. That is certainly true in my case. And a vivid location gives context and purpose to the people that come alive in my book.

The same applies in the real world. Finding an office space that supports and enhances the purpose of your business has a lot to do with the quality and originality of the work the company produces.

Commercial real estate is forecast to be the next great bubble to burst in the economy. Unlike residential loans, commercial real estate typically operates under five to seven year terms. The downward pressure on landlords through defaulting tenants and shrinking demand for office space reduces income to real estate owners, just as many mortgages are coming due for renegotiation.

The consequence puts renters in good standing in powerful positions to negotiate more favorable terms. Lengthening the term of a commitment in exchange for lower rent and space improvements for instance creates both an economic and emotional win at a time when either are hard to come by.

If you rent from a landlord who owns multiple properties, and almost all of them do, exploring their other buildings, even if you still have two or more years to run under your current lease may create a win-win.

If you have less than two years left on your current lease, have your broker analyze every building in your target area.

In either case, here is a six step plan for improving your real estate situation:

  1. Define the five best and five worst aspects of your current space situation. This should include things like expansion rights, sound, light and temperature quality, and convenience to transportation and restaurants. Issues that affect your staff’s daily experience and your company’s future growth.

  2. Ask a real estate broker to give you a list of the other buildings your current landlord owns together with current occupancy rates and most recent deals

  3. Ask your broker to analyze each building against your list of best and worst features - color code each improved feature as green, each equivalent feature as orange, each lesser feature as red

  4. Any building that you evaluate as all or predominantly green with no red features is worthy of a serious negotiation with your landlord. This negotiation should include: base rent; term; escalation rates; loss factors ( an enormous issue in New York City where loss factors can often exceed 20-25%) landlord build-out allowance and number of months of free rent.

  5. Compare the new deal to the cost and disruption of moving: moving costs; changes to printed collateral, websites, and information systems; technology infrastructure; and potential loss of business during any physical move.

  6. Decide. If the comparison is close, go back and ask for one major concession that would make the deal a no brainer.

This economy has wrought a lot of destruction to small businesses. But it can also provide the foundation for sustained, long term growth.

Whether you choose to use it that way is just that.  A choice.