The Pros and Cons of a long term lease.
JASON FINCH – One of the most common and important question that comes up when finding a new office/warehouse from a company’s perspective is “How long of a lease term should I sign?” This question is important because it impacts many aspects of the company’s future.
In my experience, most small to mid-sized companies prefer the shortest lease term possible. Organizations may outgrow the space during their contract or are fearful of committing financially because rent can be a large portion of their annual expenses. While they push for the shortest lease term possible, landlords are doing the opposite.
The industrial market in DFW is extremely strong with some of the lowest vacancy numbers we have ever seen over an extended period. Because of this strong demand, the rental rates and required lease terms have been steadily increasing.
The main ways the length of term can impact an organization:
Monthly Rent – Generally, the longer of a rental period that a company agrees to, the lower the starting base rate they will receive. In addition, a vast majority of leases in DFW have annual rent escalations or rent increases of 2-4%, and the DFW rent growth has been out-pacing 2-4%, so a longer-term lease will enable you to lock-in a reduced rent over the term.
Improvements – The signed long lease term means the more improvements the landlord will provide to the space. This is most commonly the largest factor that determines how much term the landlord will require. A landlord will provide a “Tenant Improvement Allowance” which is a set dollar amount that can apply to rearranging the office layout, new flooring, new paint, and other mutually agreed upon improvements.
The longer of a lease term that is signed, the more incentives a company should receive as an improvement allowance. If significant changes or upgrades to the space are important to the company, they can have the landlord cover all or most of the improvement costs within reason with a 5+ year lease term.
Growth – With the current booming economy, companies have been growing at a rapid pace. It can be a difficult to predict how much space companies need today and compare that against 5-year projections. One way to combat this would be to sign a lease at a location where the landlord owns many similar properties in the market.
Most landlords are glad to help a company grow. Landlords allow growing companies to terminate the lease they are in and start a new lease at a larger space in their portfolio. This will restart the lease term, but it also allows your company to grow. Other times, it may be a better option to pay the higher rent and receive fewer incentives to obtain a shorter-term lease and more flexibility.
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In conclusion, there are many factors that impact a company’s decision on what lease term is best for them. The team at Bradford Commercial Real Estate Services would be glad to review the details of a company’s situation and provide expert analysis and recommendations.