5 commercial lease negotiating tips that The Godfather would be proud of
You thought friands were getting expensive – which is ironic considering they start with ‘free’ – but Sydney’s real estate market is worse still (and not nearly as sweet). Housing costs are rising quicker than the Uber shares, yet sold signs are popping up everywhere – marking sales that have gone 20% or more over the price guide.
So, do you want the good news or the bad news? Let’s start with the bad first (it hurts a little less). Unfortunately, this is happening in the commercial sector too. With steady business growth and increasing employment, there’s now high demand and low supply when it comes to commercial office spaces. In Sydney today, the average rental cost is close to $1,100 – per square metre per month. Ouch.
So why do we feel like we’ve copped a squeezed lemon to the eye? According to Commercial Real Estate, Sydney CBD’s office market outperformed well over the first quarter of this year. Additionally, 143,000 square metres of commercial office space was requested by prospective renters between January and March, a jump of 37 percent in comparison to 2017. There’s also been a number of stock withdrawals, major construction projects falling through or being postponed in and around the CBD.
All of this commercial activity has had a knock-on effect on rental yields. We hate to break it to you but, for many commercial tenants, there’s no rental relief in the coming months. Commercial Real Estate predicts this respite won’t be felt until 2019-20, “when major projects like 60 Martin Place and Wynyard Place are completed and provide more supply.”
In Sydney rent is a growin’ and that rent ain’t a slowin’. Image courtesy of Commercial Real Estate.
Now that we’ve got the worst part over with, we did promise you some good news. If you’re a new business looking for a commercial office or perhaps you’re ready to relocate to somewhere bigger, all is not lost. You just have to be prepared to switch up your strategy. As Mike Tyson famously said, “everybody has a game plan until they get punched in the face.” In a dynamic and competitive market, be prepared to move quickly and efficiently. This all comes down to the art of negotiation and fancy footwork.
Picture this… you’ve found your perfect office space. You’re already visualising how you’re going to put your expensive feng shui Groupon training to use: You know exactly where you’re going to run your brainstorming sessions, where the Nespresso machine is going, and where you’re going to put the water feature for harmony. But remember, for any business owner, rent is one of your biggest expenses, and you could be locked in for a while. According to BDC’s Major Account manager, Brett Prikker, it’s absolutely imperative to read through a lease thoroughly before signing it. “It’s surprising how many businesses sign a lease without reviewing it,” he says. “They just sign whatever they are given by their landlord, but leases are typically open to negotiation.”
Most of us will be familiar with negotiating: shouting single-digit figures while pointing at a “Gucci” cap in a crowded Balinese marketplace where there’s wafts of cabbage. But, effective lease negotiation plays out a little differently. For you, it means avoiding hidden costs and nasty surprises, having clarity around terms, and requesting inclusions that will benefit your business in the long run. So, if you’re ready to play ball, then read on. We’ve put together our top five (totally legal) negotiating tips that Vito Corleone would be impressed with:
Do some recon on the building
Okay, so you’ve found the one, but first you need to channel your inner Horatio from CSI – indoor sunglasses and all. Before even starting any negotiations, spend some time researching the crime scene.. sorry we mean building. It’s during this sleuthing that you might unveil invaluable information that will help you when it comes down to crunch time. Take a look at the building tenants and prospective neighbours. Do their services align with your business values? Are any of the surrounding businesses potential competition? The last thing you want is to sign a two-year lease to then find out that your neighbour offers the same services as you.
Reaching out to current tenants can give you an idea of the building itself: for example, when was the last upgrade? What’s the property management like? Are the facilities up-to-scratch? How are common areas used between tenants? (Remember, there’s always that one person who leaves food scraps in the sink.) If you’re not planning to utilise any common areas, then you could negotiate this out of your lease.
Know the market, know your numbers
One of the most important aspects of negotiating a commercial lease is agreeing on the final figure you’ll be paying regularly. So do your homework, and get to know the local market. Spend some time analysing the commercial office rent prices in the area, so when it comes to negotiating the lease, you have a clear expectation of what you should be paying for your space. If it’s obvious that the agent or landlord is asking for too much, you can be a little bit smug, because you’ve got industry figures to justify your request for a lower number ready in your back pocket. Whether you like it or not, landlords love increasing rent (and counting money in their spare time) – so knowing these numbers will give you a clear idea of what sort of rental increases to expect over the next few years. It’s here you can ask yourself, is this affordable?
Seek out those hidden costs
Go through the lease terms. Then, do it again. It’s extremely important to be aware of any hidden costs woven into the lease document, and these add-ons can vary from office building to office building. Just because maintenance was covered in the last space you rented, doesn’t mean this is the case is your new one. These costs might cover utilities, upkeep of common areas or car spaces. Once you’re aware of these costs, whip out your calculator and go Einstein on your numbers. Use a matrix, mind map, formulas or even an abacus to calculate if you can afford the rent as well as any additional fees. It’s here you can negotiate your own terms. For example, you might request the rent to increase slightly in favour for the landlord to cover all of those extra costs.
Consider the length of the lease
So everything is looking a-okay so far and you’re ready to proceed with the paperwork. Now you need to think about how long you will require your lease for. Is this your first time renting? As Small Biz Trends suggest, given the fragility of a starting a business, you might not want to get tied into a really long-term commitment. Always have a backup plan if everything doesn’t quite work out. On the other hand, if you’re already established, then consider the fact that you might outgrow your office. For example, if you end up hiring more team members down the track, you might need extra desks or offices. There’s nothing worse than having an office space with the ambience of a fried chicken takeaway joint on a Friday night.
Request your own clauses
It might surprise you have the right to modify your lease. Treat your lease as you would a Create Your Taste burger at Maccas. You might not be the onion type, but my goodness you’ll order the double cheese. Much like the extra bacon, pick and choose clauses that are favourable to you and your business. Whilst the space might be almost perfect, there might be some improvements needing to be made. Maybe it needs a little bit of an upgrade prior to you moving in? For example, maybe that late 90s, off-yellow carpet has to go. These are the types of things you can negotiate prior to signing the dotted line. We talked about competition earlier – imagine if one of your competitors moved right on in next door? You can negotiate a clause that stops this from happening. Finally, it might be worth exploring the capacity to sublet your space, particularly if your business circumstances change, should you choose to move or close.
Ready to use your bargaining power?
Taking over a new office space is exciting for any business owner. It might mean taking a leap of faith on a startup, a change of business direction, growth, or a chance to impress your conservative parents. No matter your business circumstances, it’s imperative that you plan, review and scrutinise your lease agreement and terms. Understand your legal positioning and negotiate with confidence.
At CR Commercial Property Group (CRCPG), we’re The Godfather* when it comes to everything commercial leasing related. Whether you require assistance sourcing a new office location, designing and implementing a new fitout, or need someone to take care of those crucial commercial property decisions, then our team is here to help (*cigar not included).