Renew or Relocate

I’m penning this from my hotel room overlooking Midtown Manhattan. It’s time for the semiannual SIOR conference, and this year marks the 85th anniversary of our organization.
 
I’m particularly excited because my first book, The SEQUENCE, will be featured today in a main-stage interview.
 
More on the conference, and what some of the best and brightest in our industry have to say about the commercial real estate market, in my column next week.
 
This week, however, allow me to discuss a strategy you might consider if you’re approaching a lease expiration.
 
The strategy came into sharp focus last week as we counseled a family-owned company facing just such a decision.
 
Like many occupants, the company had reached that familiar crossroads. Their lease was nearing its end, and they had choices. They could renew, relocate, purchase a building, or perhaps restructure their occupancy altogether.
 
The temptation in these situations is to begin by asking, “What space is available?”
 
I believe that is the wrong first question.
 
Instead, begin with this one: “What does our business need from its real estate over the next several years?”
 
That distinction matters.
 
A lease expiration is not simply a date on a calendar. It is one of those rare moments when an occupant has the opportunity to reconsider virtually every aspect of its real estate arrangement. How much space is really needed? Is the current location still optimal for employees, customers and suppliers? Has the operation changed? Would ownership make sense? Could capital currently tied up in real estate be better deployed in the business?
 
And, importantly, what happens if you do nothing?
 
Once a lease expiration gets too close, options begin disappearing. A relocation requires time to identify alternatives, negotiate terms, complete due diligence, design improvements, obtain permits, construct the space and physically move an operation. Purchasing a building can require even more runway.
 
Meanwhile, your existing landlord knows something very important: the closer you get to expiration without a viable alternative, the less leverage you possess.
 
That is why I favor creating competition for your tenancy well before a decision must be made.
 
Even if you would prefer to stay, understand what alternatives exist. Tour them. Price them. Determine the cost of moving versus remaining. If purchasing is a possibility, investigate that market as well.
 
You are not necessarily looking for a reason to leave. In fact, remaining in place may ultimately prove to be the best alternative. But by identifying other buildings that could accommodate your operation, understanding what their owners are willing to offer and comparing those economics with a renewal, you create competition. Your existing landlord is no longer negotiating against the inconvenience and expense of your move. He or she is competing against real alternatives.
 
That competition can affect more than the rental rate. Free rent, tenant improvements, renewal options, annual increases and other concessions can all become part of the discussion.
 
Most importantly, you have transformed an approaching expiration from a deadline into an opportunity.
 
Start early, understand your choices and create competition for your tenancy.
 
Because when several landlords want your business, you get to choose which one earns it.
Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at abuchanan@lee-associates.com or 714.564.7104. His website is allencbuchanan.blogspot.com.