What is the problem?
An up-coming lease expiry can cause great angst for a tenant. Many issues need to be considered such as:
- Should I stay in my current premises?
- Is this the best location for the business and staff?
- Do I have the right or enough space in the future ie is the business growing or contracting?
- Is there something better out there than what we have now?
- How does my current rent compare with what is out there?
- Do I need to refresh the fitout or completely refurbish?
- What is this “agile/flexible working thing” and is it right for my business?
- Should I upgrade my technology at the same time?
- How long before the current lease expires should I start looking for new premises?
There are so many issues to think about that it is best to narrow it down one at a time
This piece considers how long before the lease expiry should the search start and more specifically how does the size of the premises affect the timing of the search?
The general “rule of thumb” for when to start a search
As a general rule of thumb the bigger the space required the earlier you must start the market search. Why? Consider these examples.
- If searching for 500sqm of office space it is likely that the business will be offered current vacant space or space that is just about to be vacant.
- The landlord will be motivated to fill this space quickly and will not hold the space for 2 years waiting for your lease to expire.
- Therefore searching the market closer to lease expiry will put your business in a better position.
- For a 500sqm office it is best to start approximately 9 months before lease expiry.
- If searching for 10,000sqm of office space it is unlikely that this amount of adjoining space will be found in one building.
- The most likely option is to pre-commit to office space within a building that is going to be built not an existing building.
- Therefore searching the market 3 – 4 years before the lease expiry will put your business in a better position rather than waiting closer to the lease expiry.
What are the risks of getting the timing wrong?
The risks of getting the timing of the market search wrong can result in a lack of options and being forced to pay a high rent for an office you really do not want. Consider these examples:
Example 1 – You require a small office and you search too early
- Too early can mean there will be less options for you to consider.
- Many landlords will want to lease vacant space straight away or otherwise do not know whether this small amount of space will be available in two years’ time (ie. if another tenant is going to move out of the building).
Example 2 – You require a large office and leave it too late
- Too late can mean that there will be less (or no) options for you to consider.
- Large amounts of adjoining space in existing buildings are rare and if you there is a new building being constructed you may have to choose non adjoining floors or pay
- Your current landlord will know you have left it too late and therefore will have a superior negotiating position which means higher rent and less favourable lease terms.
Putting it together
As a starting point for an impending lease expiry consider the following to determine your office size:
- Whether the business will consolidate or decentralise offices?
- What workplace style is appropriate eg. by adopting an agile/flexible work style considerable office space can be reduced?
- Which is the most appropriate type of building eg. classic CBD office building, business park or warehouse conversion?
Once you understand the future space required then you will have an understanding of when to commence the market search. As a final note – consider all issues prior to an impending lease expiry, not just the size of the office required, as many will have an impact on the timing of the market search.