When it comes to leasing office space for your business, mistakes equal euros - sometimes big euros. Here are the twelve most common mistakes tenants make when renting office space, as well as an insider's take on how to avoid making them.
Believe it or not, many tenants aren’t clear on exactly what they need. If you’re out looking for two thousand square meters but you only really need fifteen hundred (or even worse: the other way around), you’ve got problems. Prepare a space programme to figure out how much space you really need.
The purpose of renting office space is to provide a working environment that makes your people as productive and innovative as they can be. The quality of an office building can have a substantial impact on sick-leave, losing talent to competition, drop of productivity etc.. Still many tenants will just go out to the market, scroll agent listings and start visiting offices that just look great from its inviting photo’s. Without a well thought proper programme of requirements, a good assessment of potential office buildings will be impossible. If you do not know exactly what you need, you will end up with something else.
We could write an entire article on the benefits of using a tenant representative but suffice it to say there is really nothing better than hiring a professional advisor to be on your side. An advisor understands the ins and outs of the market; he or she can negotiate for you, and best of all, can filter the buildings that would be best for your business. This know-how and advice are indispensable and can prevent you from making some major mistakes which you will pay for down the road. Academic research has even proved that tenants who are professionally advised on average pay 12.7% less in rent than DIY tenants. Not to mention the benefits of advice on all the other qualitative aspects.
By not hiring a professional, the tenant signals to the landlord that it is not seriously considering alternatives to its current location. This signal reduces the negotiating leverage of the tenant and costs the tenant money. The key to a successful renewal negotiation is creating competition between your current landlord and surrounding landlords in the area, while maintaining a controlled and organised process (see #9).
Leasing office space means a whole lot of paperwork. One of the most common mistakes tenants make is that they’re not careful enough with what they sign. Everyone should read the documents – you, your attorney and your broker. Landlords think long and hard about how to make as much money as legally possible on their buildings. The ‘standard ROZ’ lease document they give you (which has been drawn up by a landlord coalition) is not designed to be fair. It is explicitly constructed to make money for landlords, so read all the documents.
Before agreeing to the rental level, many people do not benchmark similar properties and end up paying more than the market rent. It is important to compare similar office properties and find out the going market rent and the likely tenant allowances in that area before entering into negotiations with the owner. This is meat and drink to tenant rep brokers. Hire them – they know what they’re doing. The incentives and tenant incentives that landlords are willing to contribute in order to do a deal vary greatly – it is known that, for example, institutional investors tend to provide higher incentives than private investors. Also there are various specific reasons why one landlord is more eager than another. The extensive experience of a tenant advisor will recognise where and how to achieve the best results.
It requires a proper understanding of the horizon and the volatility of the development of your organisation. One company will have a straight and long term vision with little volatility where it can benefit from more competitive rental rates. Another company may have less clarity on its growth expectations. Then it is wise to have the some flexibility negotiated in the contract, such as first rights on expansion space, contraction options, break clauses, options to extend etc.. Flexibility has its price – and definitely its value, so negotiate it wisely.
It is not always obvious to think about the exit when entering into a rental agreement. But this is the (one) time to make good arrangements: the state in which you must hand over/restore the property or the terms and conditions on which you may extend the agreement.
Tenants tend to think that the landlord is all-powerful, but that is not the case. Ultimately, a landlord is in a service business and his business is to keep his building full. If this means he must negotiate with his tenants to fill his spaces, he will. This is the same for both small as well as large tenants – even if you’re a five-person firm in a hundred thousand square meter building – you have more leverage than you think.
It is often thought that negotiating a real estate transaction is all about playing games and getting to the bottom price for any building that can just accommodate your space needs. This will turn out to be ‘penny wise pound foolish’. Buildings that do not meet your functional requirements (such as a healthy working environment) and unfavourable leasing conditions may cost you much more in the end than the extra rent free you just negotiated.
Tenants commonly start negotiations too late (see #11) in the process without alternative options. By doing so they fail to create a competitive bidding environment and needlessly waste money by forfeiting their negotiating leverage (see #7). Tenants should start the negotiation process early and negotiate with multiple landlords concurrently to create a competitive bidding environment. The best negotiation results are based on a well-foundedstrategy and a good process. You need to have a good understanding of your counterpart’s position in order to understand what you can achieve. A solid process with a step-by-step approach will ensure that various offers of different buildings are transparently comparable. By carefully narrowing your search throughout the process it will support proper decision making and lead you to your perfect deal.
Dual representation should be avoided. Brokers who work for a big commercial real estate firm that works for building owners but also says it represents tenants will side with the landlord over the tenant. This is because a landlord who owns several buildings is always going to be more valuable to a big real estate firm than a tenant. Instead, choose a broker who is not conflicted and who represents tenants only.
Tenants drastically underestimate how long it takes to renew a lease or to move. Depending on how much space you need and how complex your technology is, it could easily take 8-12 months to negotiate your deal. Negotiating in a hurry has never led to a good deal.
Often tenants assume that, since they will probably renew in their current location, there is no need to start the negotiation process early or to find alternative locations. These actions indicate to the current landlord that the tenant is not seriously considering relocation. Landlords know that the managers of other buildings can take at least six to eight months to create a space plan, get construction pricing, agree on a rent, prepare a rental agreement and prepare the space for occupation. If the tenant begins the renewal negotiation less than six months from the expiration date, the tenant has less leverage in the negotiation.
