Making the most of your commercial real estate.
- It typically ranks No. 2 on the list of highest overhead expenses (after HR expenses).
- It plays a significant role in productivity and attracting the right employees.
Yet business owners too often are in a rush and don’t focus on the importance of real estate decisions, resulting in space that inhibits growth rather than facilitates it.
To Move or Not to Move
Most companies relocate because of cramped quarters. But even if you don’t need more elbow room, there are five other compelling reasons to seek a change of venue:
- Retaining and hiring personnel. In fact, this is the No. 2 reason for moving today. In a tight labor market, geography and amenities play an important role in attracting enough employees with the right skills.
- Obsolescent space. Especially for technology firms, space needs can change dramatically. What was suitable yesterday may no longer meet today’s needs.
- Upgrading your image. Maybe classier digs are in order.
- Reducing expenses. Consider the bottom line.
- Relocating near key clients. Perhaps you’ve won a big account that will be a long-term relationship.
You may wish to seek different space in your current building or start afresh somewhere else. Think about both present and future needs as you evaluate the following:
Efficiency of current space. One entrepreneur leased a small space in an office building. As his company grew, he took on adjacent space both across and at the end of the hall. Yet the total 14,000 square feet was a patchwork quilt of space. If it had been better laid out, the entrepreneur could have gotten away with less square footage and saved money.
Besides financial costs, inefficient space can take a toll on corporate culture. Expanding via a separate suite at the end of the hall or on another floor hurts communications — suddenly your team is split into different groups.
Costs. Look at what you’re paying right now. It may have been a great deal when you signed the lease, but whether it’s still a bargain depends on current conditions. After three or five years of rental increases, you may be sitting well over the going market rate — or under it if the market has escalated considerably.
Remember: Costs are relative. The cheapest facility may not be one that promotes growth and attracts employees.
Overall satisfaction. Review everything that brought you to the building in the first place — from major needs to minor concerns. How good is the property-management team? If you have disabled employees, how well does your facility meet their needs? Take into account even small issues, such as the wait time for elevators.
If you need to move but are still in a lease, you may be able to negotiate a deal — especially if it’s a tight market and your building is in demand. Subletting or terminating your lease is still going to cost, but in today’s business climate, those costs are often outweighed by the growth opportunities of being in better space.
Owning vs. renting. With escalating rental rates in many markets, it may make more economic sense to purchase a facility rather than lease space. But because of various uncertainties, such as expansion or contraction issues, most growth-oriented businesses choose to rent. Many information-technology firms have a hard time projecting their needs for the next few months, let alone five years.
There’s always the chance that you will encounter a great deal. If you have a yen to own, look carefully at the impact that real estate debt will have on your ability to borrow money or maintain cash reserves for expanding your business.
Another caveat: Some entrepreneurs are tempted to buy buildings with twice as much space as they need, planning to rent the additional space until they need it. But that means getting into the property-management business, which restricts your ability to focus on the business at hand. If you’re like most business owners, you’re already stretched.
Don’t Go It Alone
Whether you lease or own, hire a broker. One of the biggest mistakes that entrepreneurs make is being overly confident.
Yet the odds are against you. Consider: A leasing agent averages 30 to 50 transactions each year. A building owner with multiple properties can be involved in hundreds of lease negotiations. You’re doing it once, or maybe once every five years.
Myth: Forgoing a broker will save you money.
For starters, tenants don’t pay the broker’s commission. It’s customary for the landlord to pay both the leasing agent and the tenant’s broker. That doesn’t mean your broker has fiduciary responsibility to the landlord. Under the tenant-agency relationship, a broker has a legal obligation to look out for his client’s best interests.
Commissions are typically factored into the building’s budget. If you forgo a broker, that doesn’t mean the landlord is going to cut you a better deal — the unused tenant broker’s portion of the commission likely reverts back to the landlord’s leasing agent.
Brokers save time and money with four services:
- Help determine the type of space needed. You may not need as much as you think. One law firm wanted to shop for 130,000 square feet — until its broker brought in a space expert. The firm really needed 100,000 square feet, which resulted in hundreds of thousands of dollars saved.
- Analyze the market and see what’s out there. A good broker will know what space is about to hit the market within your time frame, whether it’s a sublease situation or a lease expiration where a tenant is about to vacate.
- Select the best. Brokers will perform site inspections, along with market and rate comparisons.
- Negotiate a better deal. Besides bringing hidden costs to light, brokers can save you money through increased tenant improvements and build-out allowances. Savings are not only in actual rent structure, but flexibility. There are numerous options that can be written into a lease, including expansion, contraction and cancellation rights. And it’s often these options, rather than base rent, that can be more important to a firm’s success.
Because they help leverage your time and knowledge, brokers are especially important for smaller firms that don’t have in-house expertise. They can also be helpful in pointing you to other service providers, such as information-technology experts.
Finding the Right Space
Real estate’s mantra has been "location, location, location." Yet the right location is in the eye of the beholder. Consider both your current and future needs. When it comes to evaluating criteria, one of the biggest changes in recent years has been placing more emphasis on employees.
Geography. Is the location convenient for current workers or a labor pool you’d like to attract? Are you close to public transportation or major highways? Also consider "ease of access." Some buildings may be easy to spot from an expressway, but difficult to get to.
Amenities. Is the building near daycare facilities, health clubs or other amenities that might be important to your staff? If there are no restaurants nearby and you don’t have a cafeteria, employees are forced to brown-bag it.
Make sure you have ample parking — otherwise employees will waste time hunting for spaces, and blood-pressure levels will rise before they’ve started the day. Parking has become a bigger problem today because less square footage is dedicated per worker, which means more people are worki
ng out of a facility. Parking lots that might have been adequate 10 years ago are no longer sufficient.
Image. How you want to be seen depends on your company. If you’re a cutting-edge technology player, funky space in a renovated warehouse might be appealing. If you’re a service company in an urban setting, being on a top floor in a high-rise might be important. Sometimes the address may be important. Having Boca Raton listed on your company’s stationery might be more valuable than less expensive space in nearby municipalities.
Space layout. Consider how well interior space attracts employees and promotes your corporate culture. In general, today’s emphasis is on open space and comfortable furnishings to encourage camaraderie and the exchange of ideas. More companies are adding game rooms. Break rooms, once sterile white boxes with sinks and cabinets, look more like Starbucks coffee houses. Even conference areas are more open and cozy. Yet it’s still important to have enclosed areas for private discussions, such as employee reviews.
Technology. Look for a building with high-speed connectivity. This comes in the form of T-1 lines, fully redundant fiber-optic access (so if one line gets knocked out, you’re still wired), line-of-sight satellite communications and the availability of a satellite dish for wireless communications. If there is no satellite dish or antenna on the building you’re considering, you might want to negotiate roof rights to put in your own.
It’s also important to consider the electrical capacity of the building. Electrical demands have increased with technology, and some older buildings may not be able to provide enough electrical service for today’s growing firms.
Some New Twists
Real estate is both highly localized and dynamic. Conditions that exist in one market can be entirely different 200 miles away or even in submarkets. And what’s available today can change completely tomorrow.
Ten years ago, markets had an average vacancy rate of 20%-30%. But the glut of space caused developers to slow down, and supply and demand eventually balanced. Today vacancy rates are closer to 5%, which means many incentives have disappeared.
Another shift: Ownership has transferred to larger public companies, such as real estate investment trusts. These organizations are more stringent about the creditworthiness of tenants.
Selling yourself to a landlord. In tight markets (where vacancies are less than 5%), young firms are going to find that competition for space is high. Selling yourself to a landlord becomes important, not only to get the space you want, but to enlist them as a business partner:
- Stress your growth in a way that’s controlled and well thought out.
- Promote fiscal responsibility in your company.
Partnering with a good landlord is important for growth-oriented firms because real estate must be viewed as a disposable product. The landlord provides you with a service that can be changed and updated as your business grows — not a long-term asset. Think of your facility as a temporary tool, and keep evaluating how well it’s serving your needs.
Writer: TJ Becker