You’re facing a steep rent increase. Should you stay or should you go?

Your lease is up for renewal and you are facing more than 50% increase in rent over your starting rent 5 or 7 years ago. Business is strong with revenue growth but after payroll, your office rent is your largest expense so a significant increase in your rent will have an equally significant impact on your profitability.  This is a typical scenario we are facing with our clients. Average asking office rents in San Francisco CBD have increased from under $40.00/rsf in 2012 to over $70.00/rsf in 2017.

Yet, most tenants find that relocating is disruptive and taking a step down in class is not a desirable option when business is strong. For these reasons, many tenants prefer to stay in their current location just not with a steep rent increase.

Creative Resizing

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The good news is that since those leases were signed 5 or 7 years ago, many workers prefer to and are even encouraged to work away from the office. With mobile and Wi-Fi technology, employees can work anywhere and remain productive. Culture is also impacting office space as more employers shift to open floor plans and collaborative spaces to recruit and retain Millennials.

As a result, it is estimated that tenants leasing office space in 2017 will average 151 square feet per worker, according to real estate data provider CoreNet Global. That’s down from 176 square feet in 2012 and 225 square feet in 2010. The rule of thumb for creative open space that startup and small technology companies seek has been decreasing from 200 to 250 square feet to as low as 100 to 150 square feet of usable office space per person.

Tenants that prefer to stay in their current space are getting creative by resizing their space and utilizing more open, collaborative workspaces with fewer individual offices. Essentially, doing more with less. Your total rent is based on rental rate per square foot so demising your current space and creatively resizing your layout can have a significant impact on your total rent.

Gain Leverage

Landlords know that ~70% of their tenants will renew their leases. So, if you don’t put your landlord on notice that you are considering other options, you’ve lost your negotiating leverage. The most effective way to do this is to hire a tenant representation broker to represent you on your lease renewal. Why? Because any landlord that deals directly with a tenant knows it’s a near certainty that the tenant will be renewing and the landlord has all the leverage.

Good tenant representatives will create leverage by getting market proposals that will cause the landlord to agree to the most competitive terms and conditions possible. In other words, treat you as if you were a new tenant.

Thoroughly researching your options will give you a Plan B in case you aren’t able to work out an agreement with your current landlord. There is no negotiation leverage if you aren’t willing to relocate. So, treating your renewal exactly as you would relocation will give you the negotiating leverage that a new tenant would have.

If you prefer to avoid the disruption of relocating but want to avoid a major rent increase, look at resizing your current space and hire a tenant representation broker to represent you to gain leverage with your landlord.

For our complete roadmap: How Do I Find Office Space?

 

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