Tenant View – Northern NJ Market Report – Q2 2014

“Market Conditions slow, but steady.”

DTZ’s Q2 Northern NJ Market Overview

Some notable data points:

Overall vacancy rate decreased from 17.6% for the previous quarter to 17.4%.

Average rents are $24.41 per square foot, essentially flat over the last two years.

“…a modest improvement is expected for the state’s economy over the near term and tenant activity should also expand. With no new supply on the horizon and demand projected to increase, the vacancy rate is likely to drop for the balance of 2014.”

Data Cable and The Restoration Clause

Before every desk in every office had to be wired with dedicated data lines, restoration clauses were primarily focused on removing any specific construction that the landlord couldn’t redeploy for a new tenant.  As office space becomes more generic and communications requirements become more specialized, there is an incentive for landlords to pass the cost of restoring the premises on to the departing tenant.

Most organizations are moving towards more open layouts and fewer private offices.  Many employees are now seated in a cubicle environment that costs less to install and provides a more efficient layout.  It’s easy for one operation to take advantage of much of the existing layout, thereby minimizing construction and allowing the landlord to provide competitive pricing (of course, landlords are also happy to avoid any upfront costs associated with a tenant improvement allowance).

With the advent of high speed connectivity for every employee and the evolution of data lines and the additional capacity that comes with each new upgrade, landlords have become concerned with the huge assemblies of wiring in their walls and above finished ceilings.  Every time a tenant installs cubicles or reconfigures an office, the natural inclination is to simply cut the wires where they exit the wall and leave the remaining cable inside the wall.  The cost for removing cabling inside the wall can be exorbitant and landlords are making their restoration clauses much more detailed and diligently enforcing these clauses at lease expiration.

The cost of restoring the premises should be discussed as part of the lease negotiations. Because it’s not an immediate cost, it’s easy to overlook and “kick down the road” to be dealt with later. But it’s important to understand what financial implications that may remain at the end of the term. There’s nothing worse than getting stuck with a surprise invoice as your parting gift as you depart.

The calculus behind renewing your lease

I frequently speak with tenants that are approaching their lease expiration to discuss their plans for post-expiration. The usual refrain is some variation of:

“We have a renewal option in our lease… we’ll probably just exercise it.”

“We’ll work something out with the landlord since we’re not interested in moving.”

“The landlord has already approached us with a great deal.”

Here are three reasons why that “good deal” could probably be a whole lot better:

1) The landlord is banking on your inertia. Most renewal language reads something like, “the renewal rate shall be at fair market, but not less than what the tenant is currently paying.” Rental rates typically escalate through a lease term, compounding at approximately 3% annually. Even in the frothiest conditions, chances are the lease rate will be above market by the end of the lease term, and landlords bank on this when they use this renewal language.

2) It’s expensive for the landlord to carry vacant space. Your rent is covering his debt service, taxes, operating expenses, and marketing costs (in addition to some profit.) Even in the best market, he is anticipating at least six months before he can start collecting rent from another tenant.

3) Your space works for you, but probably not the next guy. The landlord won’t have to retrofit the space for another operation. It’s rare that an incoming tenant can use the space exactly as you left it. Most likely, there will be architecture drawings, demolition and construction that needs to be completed in order to make the space suitable for the next tenant.

Yes, there is tremendous cost avoidance to staying in place, both in actual dollars associated with moving and the “brain damage” that comes with disrupting the operation. But the landlord has plenty of exposure too. Make sure you’re doing the calculus for both sides of the negotiating table before simply settling on the first offer the landlord makes.