Are you an existing or potential Commercial Workplace Tenant wondering how to proceed in today’s unique economic environment? If so, here are a few thoughts on issues you need to consider. I will split this topic into three separate posts, recognizing there are (at least) 3 different tenant profiles and the strategic advice is different for each. In this first installment I will cover prospective tenants (a business with an identified space need who has not yet signed a lease).
I am working with a Client right now who needs to lease space for her new business and reached out to me for advice on how to proceed. She has some flexibility on timing and is able to delay starting her business. It is highly likely that the US and global economies are headed for a recession; the real uncertainty is how deep the recession will be and how long it will last. During a recession, asking rents and prices typically drop as demand drops. That means that the asking rent for a space may be much lower 3-12 months from now than it is today.
A lease is inflexible; it is a written contract. In other words, the rent schedule you commit to today will not typically go down if market rents decline. If you commit to renting space today and a recession causes asking rents to drop by 25%, you will not typically benefit from that downturn, even though your income (and ability to pay rent) may be negatively impacted by the recession. I say “typically” because there are exceptions to this general rule which I will cover in the next installment of this blog post.
I can think of two potential ways to address this. First, if you don’t have to procure space immediately, I would suggest waiting at least 2-3 months before engaging an advisor like me. I hope in 2-3 months that we will have a much clearer picture of how the recession will impact the real estate market, at which point we can make a more informed decision about when to move forward with a space search. If you really can’t wait and require space now, I would suggest including in any lease proposal a clause that provides a short-term rent discount based on some published financial benchmark. That gives you short term relief while protecting the landlord’s asset value long term.
Next up…. timely advice for Existing Tenants
Chris Atwater / Author
President of Michigan Commercial Space Advisors