Friday, November 23, 2018

Is NOW the Right Time to Move?

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In a word - actually two - it depends. Today, I recap a week of meetings, situations, and the counsel we provided to businesses who believed a move was imminent.

What’s prompted the need. We met with a group last week that recently signed a two year lease extension on their space. Well entrenched are they in the building - as 35 employees arrive each day to go to work. As their product is purchased off-shore and subject to a large tariff - they pre-bought a year’s worth of inventory - which arrives in January. They now have a short term warehouse need. Rather than disrupt the entire operation, the solution appears to be an auxiliary space - in addition to the mother ship. Stay put and lease a unit close by.

Moving expenses. Most will under-estimate this cost! Depending upon the complexity - the figure can easily eclipse six figures. And, this is a stiff cash outlay day one - not an expense paid over a number of years - like a lease or mortgage payment. Faced with a rent increase of 45% - we encouraged a client to put a pencil to the new monthly rent times the number of months for the lease. The increased rent consideration was smaller than the moving costs. Even though a larger monthly outlay is coming - avoided is the moving van. Renew.

Your current situation. Under-utilized. That describes a footprint we toured this week. Changes in the stock on hand and and lagging caused a surplus of space. The easy fix? Downsize. The issue? Nothing is available that would fit the requirement. Plus, because the company benefits from a lease rate that commenced in 2012- a space 40% smaller would figure in the same monthly rate as their larger space. No move here.

Extension rights. Many companies transacted in 2011-2014. Five to seven year leases are expiring this year and next. Contained in many of these contracts are favorable extension rights - options to renew at pre-set rates, rights of first refusals on adjoining spaces, or options to purchase the premises. We encountered such a gem, recently. Origination of their seven lease happened in 2013. Guess what? If they want to stay come 2020 - they can. No negotiation needed! Why would you move?

Ways to stretch your space. We encounter so many situations where a tweak here or a tuck there can postpone a move for months or even years. Advanced material handling solutions, the addition of a production mezzanine, or the use of a third party logistics provider are three such ways.

The cost of your alternative. On deck next week is a conversation with a local distributor. Serviced is the entire SoCal basin from one owned and one rented location. Neither fit the operation anymore. So, do they sell one building and buy two? Renew their lease in one and sell the other. Sell the building and replace it with one more central to their customers? The options abound! Should be a fun conversation. Stay tuned.

Allen C. Buchanan, SIOR is a principal with Lee & Associates Commercial Real Estate Services. He can be reached at 714.564.7104 or abuchanan@lee-associates.com  his website is allencbuchanan.com