The commercial real estate industry is in one of the hottest markets we have seen in years with the state average GDP growth of 3.2 percent in 2019 and continued growth through 2020. Over 300 people move to Arizona daily. Vacancy rates for industrial and office spaces are dropping as employment gains drive up the demand.
Healthy office vacancies for both landlord and tenant hover around 12%-14% which, according to developers. Additional analytics from Costar forecasts, all office submarkets are positioned to dip below the 12% vacancy rate. This means demand for office will be high and tenants can anticipate rental increases since there isn’t a lot of office product to choose from. Over the last two years, Phoenix has witnessed rental rates jumping from $28 full service gross per square foot annually for Class A office space to $40 full service gross. That’s a 20% increase in just two years.
Yet amid the huge growth, industry experts issue pleas of caution. As companies eye their balance sheets for room for more overhead costs — or to shed some overhead — it’s more important than ever for businesses to be cautious and work with experts who know how to help- especially in this low vacancy market, where many landlords have the upper hand. With increases in out-of-state office investment purchases, comes landlord savvy negotiations and possible nightmare scenarios. Unfortunately, many companies deal with a variety of horror stories when trying to buy or lease commercial real estate and 90 percent of CEOs end up losing money when attempting to lease on their own.
One company, Paradise Village Chiropractic, Health and Weight Loss Program, renewed his lease on his own without the aid of a seasoned tenant rep. As soon as he signed, he was paying twice the going rate for commercial space in nearby complexes.
“The nightmare began when the landlord was selling the building and I only had a few weeks to make a decision whether to stay or go. I felt pressured to decide, so I signed the lease. Renegotiating leases is just not what I do as a doctor, said Dr. Scott Carmachel.
Dr. Carmachel is unfortunately not alone when it comes to every day landlords. As someone who has practiced commercial real estate for over twenty years, I have highlighted the following tips in the hopes that the information will be helpful for businesses who are searching for their dream office and negotiating a lease:
- Hire an experienced tenant representation to guide you through the entire lease transaction – at no cost to you so you can have your dream office without breaking the bank.
- Engage in candid discussions with your rep about where you company is today and where they want to be in the future.
- Define a lease transaction timeline from touring to move-in, allowing at least 6 months from your initial tenant rep meeting.
- To be sustainable, the office needs to support the business and be less than 12% of your operating expenses.
- Understand the balance between economics and location. A high-profile location is sexy and costly, yet not always necessary to conduct a successful business.
- Office culture promotes employee retention. Select a building and location that makes your employees feel important and needed and easy to access.
- Define your space requirements ahead of time. Poor utilization of space is where companies lose a lot of money. Often the landlord will pay for a space plan.
- Purchase an industry guidebook, like SimpLEASEity™, that guides you through the lease process, provides details to find the perfect location, explains how to negotiate a killer lease and put more money into your business instead of your landlord’s pocket.
- Everything in a lease is negotiable. Don’t settle for an ok deal.
- Always have agreed upon lease terms in writing! In disputes, the written lease rules.
Paradise Village Chiropractic, Health and Weight Loss Program is not alone with his nightmare situation. Unfortunately, many new business owners have trouble dealing with lease negotiations.
Maid Right owner, Angela Clayton, signed a five-year lease and the company didn’t know the building was about to be sold. Maid Right says, “The new landlord was desperate for tenants. He let almost anyone lease the property. The space next to me had someone sleeping in the building overnight. The restrooms weren’t cleaned, the repairs didn’t happen, and the neighbors made us so nervous that we didn’t want to leave after dark.”
Today is a totally different experience for Maid Right. They worked with a professional commercial real estate agent who identified several properties and was able to find a new space for the business.
With the strong commercial real estate market, those leasing need to be extra vigilant when working with landlords and negotiating transactions.
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