In Southern California, renewing an existing commercial/industrial lease is often a likely outcome – here’s how to make the most of that option.
The old saying: “it’s miserable, but it’s home” has taken on a new meaning in these times of short supply. Throughout Southern California, businesses owners looking to improve their facilities situation have become increasingly frustrated by a lack of choice, especially when it comes to quality.
Virtually all of the inventory of industrial buildings is at least 10 years old and literally thousands of buildings are more than 25 years old. Low calculation sprinkler systems, inadequate clear heights and aging office buildouts are forcing more tenants to renew in place and figure out other ways to mitigate inefficiencies. Even those business owners willing to leave the area find that things aren’t much better in the Inland Empire or Los Angeles where vacancy rates have also fallen into the low single digits.
Development of new product just isn’t happening and there is no reason to believe that it will any time soon. Land is just too expensive, construction costs have risen and it takes forever to get a project through the entitlement process. So, if you are in need of space, what little you have to see is what you have to choose from.
That makes renewing your existing lease a more likely outcome of your search. If that’s the case, what should you be doing to make the most of that option? Let’s take a close look at a few key action items:
First: Engage a good commercial real estate professional. That may seem a little self-serving coming from us, but we believe it is important enough to take that risk. We help business owners make good decisions. That doesn’t change just because the market does. We help you explore all of your options, and with fewer of them available these days, it is even more important to do so.
Even if it’s not us, pick someone who has the experience to get the job done right. It will produce a better outcome. While it might seem logical to assume that you will get a better deal by dealing directly with your landlord, the opposite tends to be true. By having your own knowledgeable representative, you will be negotiating from strength derived from current market knowledge and experience.
Second: Look into other ways to utilize your space more efficiently. Materials handling specialists, facilities engineers and the construction trades are in the business of helping businesses improve space utilization.
They can help you take a fresh look at your operation and discover new ways to do more with less. Your business has probably changed a lot since you last moved, but the layout of your facility is probably the same. Maybe it would be better to spend the money it would cost to move on improving your existing space instead. We can help direct you to qualified professionals with a simple phone call.
Third: Give yourself more time to get it all done. This may be the most important thing of all. Whatever you do, don’t wait until the last minute! You will regret it if you do. Point made. Everything takes longer these days, and the space you need will probably not even be on the market when you start your search. If it is, you may be competing with several other businesses to get it.
Depending on the complexity of your requirement, you should allow up to a full year to complete the process. In many instances, properties being marketed are still occupied by tenants facing the same tight conditions that you are. You get the picture.
Fourth: Understand your landlord’s intentions. For most tenants, the extent of the contact with their landlord is to send a big check every month. As long as there are no problems with the building or the payment of rent, both parties are generally content to keep the relationship at a comfortable distance. But, knowing what the landlord’s plans for the property are figure heavily into the lease renewal equation.
If your landlord’s plans to keep the property for the long term and you have been a good tenant, they may be more inclined to help pay for modifications that will allow you to increase efficiency, or finally get to those items of deferred maintenance that they have been ignoring. If your landlord is unsure of his investment strategy, they may be more inclined to maintain the status quo and be more difficult to negotiate favorable renewal terms with.
They may even have near term plans to sell the property, which would bring a higher price if it is empty, which either opens up an opportunity for you to buy or confirms that you will be looking for a new home for your business. Since we work with landlords every day, we have gotten pretty good at assessing their intentions. In fact, we are often engaged by property owners to make strategic recommendations. Through understanding of the intent of both parties, we are often successful in structuring lease and sale transactions that work for all concerned.
Fifth: Treat the renewal process as you would a new lease. While it may seem like the simplest alternative, renewing an existing lease can be just as complex as a move to another location. Market conditions, your landlord’s investment objectives and your needs as a business operator are just as much in play with a renewal. It’s not just a matter of agreeing on the new rent and changing the expiration date.
There may be a variety of other issues to address that could improve your situation, and renewal time is the best and most logical time to get things taken care of.