A Guide To Renewing Your Office Lease
October 19, 2020 | by
Reviewed by real estate expert Jonathan Tootell
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If you are renting a commercial office space, at some point, you will have to think about whether you want to renew your lease or move offices. A future lease renewal on your rental presents a great opportunity to 1) evaluate your commercial lease vis-a-vis the commercial real estate market and 2) negotiate the terms to be more favorable to you.
It’s important to realize that when you renew your lease agreement, you are generally starting out at an advantage. It’s preferable for your landlord if you stay, as new tenants come with new requirements, like potential build-outs and space modifications, which can end up being costly for the landlord. With a vacancy, they may also face a loss in rent and will have to shell out to market the space to attract new tenants. Don’t fall into the trap of being a captive tenant!
When you renew and negotiate your commercial lease, it’s important to enlist the help of a tenant broker to explore your renewal options — otherwise, you’re likely putting yourself at a serious disadvantage. Here’s why:
Why you need a tenant broker
- Hiring a tenant broker creates leverage: When you hire a tenant broker, it shows your landlord that you’re serious about pursuing the best office space option on the market. Without broker representation, landlords assume that a tenant doesn’t want to move and is going to renew the existing lease. By hiring a broker, you show your landlord that the chance of you pursuing other options on the commercial real estate market is high, and they’ll immediately be motivated to work to keep you in negotiations.
- Tenant brokers are market experts: The market is too vast to be able to fully understand without a serious expert. Even if you have a general knowledge of commercial real estate in your area, a tenant broker will be extremely well-versed in the current market conditions. They are working on commercial real estate transactions day in, day out and will be able to leverage detailed knowledge, data, and experience in negotiations to ensure that you are getting the best possible deal relative to the current market.
- Your landlord isn’t looking out for you: Even if you get along with your landlord, it’s important to remember that you two have fundamentally oppositional goals in negotiating your commercial lease renewal. When negotiating your business lease, your landlord and their broker are going to fight to get the most money, the fewest concessions, and the longest lease term possible. A tenant broker will fight to get you flexible terms, concessions, and low rents.
- It doesn’t cost you anything: Tenant broker services come at no cost to you, so why not get your commercial lease reviewed by one? Even if you’re content with your current lease, it’s still advisable to have it reviewed in detail; leases are complex, dense documents, and it helps to have a set of expert eyes see if they can catch any clause you may have missed. It’s very possible that your landlord could be overcharging you in certain places, so having a tenant broker review your lease could help you save money!
- Savings can be significant: Real estate is often one of a business’s largest expenses, so any reduction in rate can be significant. For example, if your office space is 10,000 square feet at $80 per square foot with 5 years remaining on your lease, that’s a $4 million obligation! Reducing this rate by even 10% in your commercial lease renewal (in the form of free rent or a reduced price per square foot) will result in a lot of dollars saved.
- They can help you get other concessions: In many scenarios, companies don’t just want to negotiate their real estate costs — they also want to meaningfully improve and optimize their space. When you negotiate your business lease, your tenant broker can help your company get new incentives and concessions, such as tenant allowances to update your space, new space or building amenities, and updated infrastructure.
What to consider before renewing your office lease
- Your desired lease term: The needs and growth trajectory of your business will inform how long you should be reasonably committing to your office lease. If you plan on scaling, or if you’re not sure where you’re going to be a year from now, you’ll likely want to err on the side of flexibility when negotiating a lease renewal.
- What you need out of the space: It’s likely that your company needs have changed from when you first moved into the building, or that you have a more developed understanding of the rental’s constraints. Is there anything you’re missing that would help your business and its employees be more successful? For example, maybe you need more sophisticated technological infrastructure, or maybe there are some amenities that need updating. Make sure to let your tenant broker know what concessions to ask for in your lease renewal.
- What your other options are: While you may be dead set on renewing your current lease, it’s still important to get a sense of what else is on the real estate market to see whether you could be paying less for more. Have your tenant broker show you options in the nearby area to get a good sense of market rental comps, which will also better inform your lease renewal process. You may even wish to look at spaces in another location if you’re entertaining the possibility of a move and a new lease.
- How much time you have left on your lease: It’s crucial to give yourself a good amount of time when pursuing a lease renewal for your company; you should start the lease renewal process well before your office lease expiration. In the era of COVID-19, you can even look into renewing your lease up to 5 years before expiration. There are many great deals to be had right now, as landlords want to secure their business tenants now more than ever due to the weakened demand for office space. You may even be able to leverage a “blend & extend” strategy, in which you renew your lease early and extend your lease terms for an improved lease agreement. Generally, it’s crucial to plan your lease renewal well in advance in order to negotiate the best deal possible.