Posts tagged: office lease negotiations

It’s no secret that Chicago commercial real estate values have declined in the economic downturn. Landlords have suffered from increases in vacancy rates and tenant defaults.

While this is bad news for landlords of office buildings, it’s good news for prospective office space tenants.

Increased vacancies mean more office space rental options and increased defaults means those office tenants with strong financials have the potential to leverage their security in exchange for lower rental rates and lease concessions.

However, in order to effectively capitalize on these opportunities, you need to employ the right strategy.

These 10 steps will keep you on the right track.

Assemble key Decision Makers and Advisors

Before you begin analyzing your office space needs, assemble all your key internal decision makers.  This should include anyone with insight into your company’s forward trajectory and growth plans, including finance, human resource, and IT professionals.  Getting everyone on the same page from  day one will not only save valuable time down the road, but often these professional will  shed light on issues that might have otherwise been overlooked.

During this initial assemblage, you should also retain the services of a tenant representation broker.  Having one professional represent your interests provides for one single point of contact, allows for more effective negotiations, and ensures your commercial real estate broker is representing your interests rather than the landlords.

Determine Future Space Needs

Working with your professional space planner, carve out a future needs assessment.  You should be considering factors such as growth or reduction plans, projected budgets, anticipated technology requirements, as well as branding and image issues.  If you’re trying to create a ball park figure in your head, assume approximately 200 square feet per employee for general office space, with professional service firms such as attorneys usually using about 400 square feet per professional.

Handling this upfront is more important today than ever.  Many companies have gone through staff reductions and you may have extra space (and extra money) available right under your nose.

Additionally, this upfront planning can protect your company’s future.  For example, you may want to negotiate a right of first refusal on contiguous space.  If you don’t assess your space needs, you could miss an opportunity.

Create Your Real Estate Plan

Now that you’ve examined your potential space needs, get a summary down on paper.  Include information such as your cost parameters, ideal lease term length, ideal locations and building types (Class A, Class B, Class C), and organizational issues.  Do you need creative office space?  Do you need lots of perimeter offices?  Understand these needs now.

You should also address parking needs, security and access issues, office hours, timing, signage, and the need for tenant improvements.

Organize your list by priority.

Creating this plan upfront will avoid you touring space that won’t work for your business.

Present Your Requirement to the Marketplace

Now it’s time to put your tenant representative to work.

Armed with your detailed space needs, your broker will survey the market and come back with relevant options.  Since you’re working with just one broker, they will be able to confidently approach the entire marketplace on your behalf to ensure your hearing about every possible opportunity.

Tour the Marketplace

Now is the time to get out and look at space.  Bring your real estate plan and evaluate your needs and goals against the available space.

Shortlist and compare your top choices

After you’ve had an opportunity to tour all potential buildings, shortlist your top choices and create an apples to apples comparison.  Make sure you consider both the financial and logistical factors.

Request Proposals

This is where you begin to trade paper and negotiate your deal.

As we discussed, it’s a good time to be a tenant.  High vacancy rates are forcing many landlords to drop prices and increase their tenant concessions.

There is a flip side to this.  Landlords have been burned during the recession.

There is close scrutiny on financial statements and an increased wariness of unproven businesses.

You have to approach this stage properly or you can end up with a bad deal or no deal at all.  A good tenant rep is an invaluable asset during this stage.

Sign your Letter of Intent and Negotiate Lease Documents

Once an agreement has been reached, both you and your landlord will sign what’s known as a Letter of Intent.  This is generally a non-binding document that outlines the major lease points.  Your attorney will use this to begin drafting your final lease documents.  It’s a good idea for your broker to work in concert with your attorney to ensure the spirit of the language reflects the negotiated terms.

Navigate the Construction Phase

After your lease is signed, you’ll need to begin the work of improving your space.  It goes without saying that if you’re moving into a raw space that needs to be completely built out, this will be significantly more complicated than moving into a built-out space that needs minimal improvements.

If you’re looking at building out space, a good project manager can be an invaluable resource.  They can help you review construction bids, as well as bids from furniture and IT vendors.  They can also manage the construction process, coordinate inspections, and track progress against your projects completion dates.

Supervise Project Completion and begin Occupation

In this last stage, you’ll want to ensure the practical completion of the project, meaning, your contractors have done the job they said they were going to do, and the job is up to standard.

You’ll also submit your Code of Compliance Certificate to your landlord.  They will require this before you occupy the space.

You’ll also want to give your space on final walk through to make sure everything is in its place.