Advice on Renewing Your Lease
Now is a great time to renew your industrial lease. Prices have never been lower, probably much lower than when you first leased your space 3 or 5 years ago. But your landlord won’t voluntarily lower your rent to today’s market. By researching and negotiating on other spaces, you can force your current landlord to compete at today’s rates. Your renewal deal will be a combination of concessions, the rate, space needs, and moving costs.
Atlanta industrial lease rates have eroded over the past 2 years. Vacancies are above 20%, with less demand from new tenants. Read the front news section and articles page of this website for current lease rate news. That means that you can get a great deal. But, realistically, you won’t get $1-2/sqft without some kind of catch later in the lease. Look at the deal from your landlord’s perspective.
He knows this is an economic cycle, and rates will go back up in a couple years (2,3,4,?). So he doesn’t want to be locked into a rate that’s 50% less for more than the short term (3-5 years). He doesn’t want an empty space, because that will make him $0 for up to 12-18 months. But he can’t afford to give the space away, upsetting his other tenants and his lender.
Your best deal is on one where you stay in the space for the next 5 years. He will give you a great rate for the first couple, and wants flexibility toward the end of the term so the rate goes back up to market (hopefully higher in his mind). He is short of cash right now (like everyone), so he would rather give you a low rate and some free months of rent than spend money on remodeling the space for you.
Ultimately, you will get the best rate if you’re willing to leave to a new space. A tenant representation broker (like me), will help you research and negotiate a list of comparable spaces. Those other spaces are ammunition for your lease renewal negotiation. Even if you don’t intend to leave, doing the footwork will bluff your landlord to make you a more attractive offer.
Your best deal will be on a full term renewal, 3 to 5 years. Some landlords will do 1-year renewals in this market. But you won’t see the best rates or concessions. You may be reluctant to commit to the longer term in this economy. But doing so may save you thousands of dollars by locking in today’s historically low rates for a longer term.
A lease renewal is an opportunity for you to get some needed improvements or even free rent from the landlord. The landlord doesn’t want to lose you, and have an empty space for 6 to 12 months. Many will upgrade lighting, replace carpet, upgrade exterior components of the building, or answer other requests. Sometimes they will prefer to give you free months of rent (or reduced rent) so you can spend the money on your own upgrades.
If you anticipate needing more or less space, then that can be addressed at renewal. An advantage of leasing from a large landlord is the flexibility to move to other spaces in their portfolio. We are seeing a lot of business downsize in this lean time. But if you anticipate growth on the horizon, you can include a growth clause or Right of First Refusal on larger/adjacent space. This a great option to keep current overhead low while planning on the market rebound.
It isn’t free or easy to move your business. That’s especially true if you have extensive equipment installation. But those costs may be dwarfed by savings in an aggressive lease offer. It’s important to analyze the entire deal from an objective financial perspective. Sometimes $50,000 of moving costs can be offset by free rent and lower rate at a new location. A professional broker can help you put all the components into focus.
Weighing renewal options, new lease options, and purchase opportunities can be difficult. A short-term lease renewal is easy, but leaves the future uncertain. A long-term lease or a purchase require greater commitment, but may offer the best overall value. Look at your business goals, your comfort level, and advice from a third party professional to help you through the process. Tenant Rep brokers like me are paid by the landlord, but represent you with market knowledge, negotiaion, and analysis that can save you thousands.