Making Real Estate Work for You: Strategies for Finding Savings in Current and Future Leases

While businesses devote many service hours, and many dollars, to secure a bit more in net income, they often overlook real estate costs as a major potential source of savings. Unlike other major expenses such as payroll, research and development, insurance and marketing—it’s relatively painless to reduce a business’ real estate costs—the only place that will feel the cut is your bottom line. Occupancy costs are too often dismissed when companies are exploring ways to reduce spending and improve cash flow. That means that many companies are leaving large amounts of money on the table.

Want to start tapping into potential real estate savings? Here are three strategies companies can deploy to ensure they extract the most out of every corporate real estate transaction:

1. Renegotiate Your Lease Renewal: Landlords are eager to secure lease renewals from existing tenants, as renewals offer landlords the best insurance that they will continue to reap steady profits. That gives tenants serious leverage when it comes to negotiating the terms of their renewal. Consider this: each year real estate owners build into their financial models debt service, property taxes, operating costs, leasing commissions, tenant improvement costs and vacancy. When a tenant renews a lease, the landlord is typically on the hook for far less in tenant improvement dollars compared to what they’ll need to spend to entice a replacement tenant. And the landlord not only enjoys less capital outlay for a renewing tenant, he or she also has zero down time. The point of indifference—the point at which an existing tenant is equal to a new tenant in terms of profitability for a landlord—can be up to 60% below the landlord’s “asking” or market rental rate. That knowledge provides additional leverage.

To capture these savings and come close as possible to the landlord’s point of indifference when negotiating a lease renewal, tenants must develop an effective strategy that puts that leverage into action. Working with a tenant-focused real estate team like Hughes Marino, who are experts in renegotiating leases on tenants’ behalf, is a great place to start.

2. Early Lease Restructuring: Many businesses are paying above market in rent but assume they have no recourse. The truth is that an early lease restructure is often a viable option for recouping substantial savings. But to negotiate it successfully, the tenant and broker need to present a compelling case. If the landlord believes the tenant will vacate upon lease termination, the occupant can use this to his or her advantage. Before you begin strategizing, however, there are a number of criteria that must be met:

1) Less than half of the lease term must be remaining

2) The larger the gap is between a tenant’s current rent compared to market rates, the more likely this scenario will succeed

3) Creditworthiness is king

4) The tenant shows interest in staying in the building

5) The tenant is in need to expand or downsize their footprint

The more of these criteria a tenant fulfills, the more likely his or her chances at securing a rental reduction is, even in the middle of a lease term. It’s worth noting that not all criteria have to be met and this strategy will depend on the landlord’s long term goals with the property as well. For example, real estate investment trusts (REIT) can be opposed to this tactic because they are based on quarterly earnings, which may be substantially affected through this structure. However, there are other lease structures that REIT's do welcome and can achieve the same goal for the tenant.

3. Using Space Efficiently: It’s nearly impossible to find an office space with the exact square footage that a business needs. Each building has distinct features that contribute to the overall space—load factors, floor plates, common areas, angles and architectural features to name a few. These features all impact a space’s inefficiency as well. As the tenant, it’s your job to ensure you aren’t paying for space you don’t need. Evaluate offices with an eye toward usability, as opposed to just likeability. Consider that a company requiring 20,000SF of space at $2.60 per square foot per month in rent will save over $300,000 over a five-year lease term just by leasing 10% less space. Before spending hours with a real estate professional touring potential offices, spend the extra time up front determining your space needs and how they can be met with general occupancy standards. Then, when you set off on your office tour, analyze each building’s floor plate and layout for maximum efficiencies.

The final word: Businesses can look at lots of areas to save money and increase profitability, but real estate—one of the largest fixed expenses after payroll—is one of the best places to find savings if you know where to look. Understand your leverage as a tenant, consider all your options before renewing and evaluate potential spaces for efficiency to find new places to secure savings. A tenant-focused advisor at Hughes Marino can walk you through the options and negotiate a deal with your current or prospective landlord that ensures no money is being left on the table.