Lessons learned while preparing for new lease accounting guidelines
With so many real estate variables to consider, we’ve outlined six key factors every business decision maker should consider when working on an office lease.
Your greatest assets are your people. Attracting and retaining talent is likely your greatest challenge. When evaluating your next office space, consider how the space aids or undermines the productivity of your people. In addition to productivity gains or losses, companies see the bottom-line impact of their real estate decisions on retention, recruiting and hiring costs. Before considering a lease renewal or relocation, analyze your employees’ commuting- and space-use patterns.
A good tenant-oriented real estate advisor will have workforce and workplace strategy professionals who can analyze these patterns, with a combination of surveys, interviews and technology tools. You need to find out where employees live, how they get to work, and how they are using your current space. Ask how they interact with one another, whether the space allows them to be productive, whether there are enough meeting rooms, and if collaboration areas are convenient and purposeful. Look for a space with open, unobstructed floorplates, which gives you maximum flexibility for activity-based office design. Studies show employees are more engaged and more productive when they have a choice of workspaces tailored to their task at hand. Importantly, consider how the space will reflect your brand and culture.
Transportation, access to public transit
In considering potential spaces, find out how many employees walk, drive, bike, or ride the train and subway. You should consider access to subways, metros, trains, buses and highways. Choosing a new location that doesn’t match your current employees’ needs may motivate some to look for work elsewhere. Strengthen your future recruiting efforts by studying the neighborhoods attracting younger workers. In a competitive job market where great talent wins the day, location will likely be an important deciding factor for the best and brightest in your area.
Amenities and neighbourhood appeal
Globally, we see a growing trend for office space to be located in areas that offer multiple options for pursuing a work/life balance. The demographics flocking to downtown or the suburbs should be weighed in determining where your company’s demographic fits best, and what your objectives are. If you have a mature workforce that drives, then the suburbs might make sense. However, if you have a young workforce — many without cars — living in the downtown core, an urban setting may be a better choice. It’s essential to evaluate the available amenities, not just in the buildings, but also the accessibility of nearby restaurants, retail and cultural attractions, as well.
Prevailing rents will depend in part on whether it is a landlord’s or tenant’s market when you execute your negotiations strategy. There are many components that make up gross rent, which is often based on current market conditions. Ask which operating expenses are controllable and whether increases can be capped. A knowledgeable advisor, especially those without obligations to landlords, can help you create negotiation leverage.
Leasehold improvements & fit-outs
One of the most common office leasing pitfalls we see is tenants focusing most of their attention on rent, but neglecting to spend sufficient time on the capital cost of the leasehold improvements required to house their people. The capital required to make a space “workplace ready” is equal to about two years’ worth of rent. Tenants need to consider opportunities to reduce this capital cost, such as landlord contributions, and whether a former tenants’ investments, and existing leasehold improvements can be used. There are many avenues to finance this capital investment, and tenants should investigate how to get the most value out of leasehold improvement dollars.
Typically, most leases are negotiated for term lengths of five years or longer (up to 7, 10, 12 or 15 years), but business needs change over much shorter timelines. Business leaders find it difficult to predict the future, and because of that, building flexibility into your lease is paramount.
Rights of first offer and refusal and options to expand are keys to growth, but what if you need to downsize or get out of your space? A right to terminate could be a lifeline. Most landlords’ standard subletting provisions are very restrictive, so ask if you are able to sublet to other tenants in the building, and whether you can profit on subletting your space if the market rents have risen. Understanding termination and subletting provisions are keys to your success.
Stan Krawitz is Vice Chairman, Founder and Head of Savills Canada. He advises clients through corporate real estate decisions with a proven process called FLOW™, which determines the relative importance of these variables, and assimilates them through a process that is customized to a company’s specific needs.
For more information get in touch with Stan Krawitz.