Economists are telling us that in 2016 corporate profits are down and business owners are back in survival mode. In the face of a National Election quite unlike anything seen in modern history new business expansion is on hold and folks are trying to understand what the implications of FED Chairman Janet Yellen’s interest rate hikes will have on their bottom line. I tell my clients that to survive is not a long term goal. For business owners the long term goal should be to thrive.
So, just how do you make long term decisions in the face of such uncertainty— and what does all this turmoil portend for the real estate market here in the Garden State?
The Ostrich answer to uncertainty is to bury your head in the sand. In real estate terms this means avoiding tough decisions by going short term. The CEO’s survival instinct is to stay flexible. The CEO might think, “Instead of renewing that lease for five years, maybe we’ll just commit to a one-year lease or even see if we can go month-to-month”.
As they soon find out, there is a high price to pay for short term leasing, and it usually is in a much higher rental rate demanded by the Landlord in return for the short term commitment.
When business is slow, smart business owners know that they need to preserve capital, and also to find creative ways to reduce their operating overhead. The very smartest will use the services of a real estate advisor to help them formulate an effective strategy of “having your cake and eating it too”. Real estate advisors can show tenants how to win in almost any market.
In New Jersey, we are at an unusual time in the real estate business. Many office building owners have had their assets for many years, and the smart ones have been able to reduce the debt service on these properties by steadily paying down their mortgage balances. This means that even though right now vacancy rates are trending up, cash flow is still healthy for the majority of long time property owners. Landlords are thus able to reward stable tenants with long term leases and they can afford to be creative.
One strategy I have found effective for tenants this year is to secure a long term lease with cancellation options at various benchmarks across the lease term. For example, a stable tenant renewing the lease may commit to a new ten year lease term with the right to cancel the lease at various benchmarks such as the end of the 3rd, 5th and 7th years with cancellation penalties that reflect the reducing risk to the Landlord over time. The tenant now is able to reduce his overhead by operating on a long term lease cost structure while maintaining the flexibility that enables the business owner to sleep at night.
It is at times like these where we tenant advisors can be most effective by implementing proven strategies to reduce operating overhead while maintaining flexible leasing options.
Do you need a lease tune-up? Give us a call, and let us show you why, “OUR DIFFERENCE IS YOUR ADVANTAGE®”.
Categorised in: Negotiations