There has been a tremendous amount of discussion around the death of the suburban office park over the past few years. Central business districts have become the “hot” places to work as both traditional companies and start ups have moved from the suburbs into downtown areas. The big justification is because that’s where millennials want to live and work. This has been particularly acute in New Jersey, where the aging office market has maintained high vacancy rates while New York City has seen occupancy climb steadily.
Two articles over the last few days suggest that this trend will change in the coming years.
First, 2015 will mark the date when millennials finally outnumber boomers. “75 is the approximate number, in millions, of millennials that the United States will have this year. The total of millennials — those born from 1981 to 1997 — will reach 75.3 million, overtaking baby boomers (1946 to 1964) as the United States’ largest living generation.” These are younger people that are starting their careers later and having families when they are older.
Second, a recent survey shows that they really do want a suburban home rather than a condo in the long-term. “The survey, based on responses from 1,506 people born since 1977, found that most want to live in single-family homes outside of the urban center, even if they now reside in the city.”
A growing population of millennials and their eventual move to the suburbs will fill the homes that are being sold by empty-next boomers. Will they keep commuting into the city centers? Or will they insist that better transportation alternatives be developed so they can work close to home in the suburbs?
I received a panicked call from a client the other day… “We missed our renewal notice window! We were supposed to tell the landlord that we wanted to stay! The general counsel is freaking out!!!”
As I talked him off the ledge, I explained that while a renewal provision certainly provides protection and expands your options as a tenant, this was not a crisis, and we had in fact missed the renewal date on purpose.
The basic concept of the renewal option is that the tenant has the right to extend their lease for a predefined period at the end of the term at a predetermined rate with appropriate notice. Some leases spell out a specific rate for the extension term while others quote that the rate should be “fair market value” and still others suggest that it should be some percentage higher than the rate for the existing lease.
While all of these provide protection for the tenant, that protection only exists in the event that the landlord wants the tenant to move out of the space. In the event that the landlord wants the tenant to stay, chances are that activating the renewal option will allow the landlord to maximize the rent going forward. The landlord isn’t going to compete in the open market and certainly isn’t going to offer the most aggressive terms available.
Rather than automatically activating the renewal option, take some time prior to the notification date to evaluate the market, solicit competing landlords for proposals, and then approach your landlord about renewal terms. At the very least you’ll be able to define “fair market value” and validate that the rate in your extension is in fact, fair. At best, you’ll find a more attractive deal and force the landlord to compete in the market. Either way, you’ll be making an informed decision.
For the record, my client was set to renew at their previous rental rate, which was $4.00 above the building’s current asking rate. If they had simply activated the renewal like the general counsel had wanted, it would have cost them almost $100,000 in additional rent.
At the outset, most lease deals look pretty straightforward. There is an expiring lease, a defined need, and an established geography. The tenant engages a real estate broker to explore options in the market and identify the best possible options, enter into negotiations, and ultimately settle on a short list of buildings with which negotiations will start. Best and final terms are reached, a deal is struck, and leases are drafted with the best possible facility. In an ideal world, this is how the process would go. And the entire thing could take as little as ninety days from start to finish. Everyone is cooperating and there are enough “atta boys” to go around.
In my experience, this never happens. Whether they are minor snags or major problems, something is always comes up. It can be tenant driven issues such as a shift in business strategy, a layout change, or loss of a major account. The landlord might pull their property from contention or dig his heels in during negotiations. Nobody likes to think about these things, but it can create significant exposure for the tenant. They may end up in holdover (paying double rent) potentially exposed to damages (if the landlord has leased their current space) and put operational objectives into limbo while waiting for the dust to settle.
Some suggestions to hedge against a small hiccup turning into a major problem:
1) Start the process early. There are few situations that some extra time can’t fix.
2) Keep an eye on the market and a back up list of alternatives. Knowing what else is out there not only gives you negotiating leverage, but also allows you to refocus if your primary choice disappears.
3) Negotiate (in good faith of course!) with multiple buildings simultaneously. There is nothing wrong with engaging multiple buildings during the process, and I expect that landlords are doing this as well.
I’ve had many instances where we have been close to requesting leases only to hear from a client that they’ve decided to change the headcount, consolidate multiple operations, or move the facility closer to customers. I’ve also received calls from landlords informing me that the building we were considering just got leased to another tenant. These things happen. From experience I know that the better job I do of alternatives planning, the smoother the deal will go.