You're having trouble finding less than 2,500 SF of commercial space to rent.... Here are 2 reasons why, and 3 things you can do about it:
1. In many buildings, the economics of leasing this size of space make it difficult on several fronts. Generally speaking, it’s hard to stabilize a building with office suites under a certain size threshold, and rarely are new office buildings ever built with this size user in mind. (There are a few that have done so, and have done it well, but you pay a premium on a $/SF basis.)
Let's look at an example:
1500 SF X $16/SF = $24,000 per year gross income to Landlord. Pretty good for him/her/them right?
Not really. If it’s a typical “full-service” lease in an office building, the landlord will pay for utilities, real estate taxes, building insurance, building management, landscaping, snow/ice removal, periodic upkeep on roof, parking, HVAC, not to mention debt service, which will reduce the net income on the building significantly.
The building can’t lose money, at least not for long. That’s common sense.
2. Also common in this size range, are tenants seeking shorter terms, in the 1-3 year range.
This also limits how much money the Landlord is capable of investing in the space on upgrades or renovations significantly.
If a landlord offered a reasonable $15/SF build-out allowance to renovate your new office prior to moving in, it would look like this:
$15 x 1,500 SF = $22,500.
In this example, which is not uncommon, the space would still be losing money at the end of the year, and the owner still had to cover the utilities, taxes, insurance, upkeep and maintenance in the meantime.
What happens when the actual cost to renovate is $25/SF or $40/SF?
Tenants, on the other hand, are often unwilling, or unable to dump that kind of money into someone else’s property.
So as new buildings mature, owners resist chopping them up into smaller and smaller suites, yet like a pyramid, with the largest users at the top, there are many users in this range.
No wonder this size suite can be hard to find sitting empty and in “turnkey” condition.
So what can you do about it?
Here are 3 ways to improve your odds of securing your 0-2,500 SF space:
1. Take the space “as is” or as close as possible to “as is”. This will require finding that perfect space, already built to your needs. But it will allow you to short cut the tenant and landlord cash flow issues related to build out.
2. Prepare to offer a longer term.
Five years, 7 years, even 10 years, and be willing to back it up by providing financials on the company, or by signing a personal guarantee and providing personal financials.
With that type of transparency and commitment, you will instantly stand out among the typical tenant that calls on the space, and it may be just the trick to entice the building owner invest in building out for you.
3. Offer to pay for the build out yourself, up front, either to the landlord or directly to the contractor.
This also removes some of the financial risk from the landlord and shows a high level of commitment from the Tenant.
Again, if you can show that you have the resources to cover your own renovations, you will immediately move to the front of the line in the Landlord’s mind and you’ll be in a good position to negotiate on the rate.
In my experience, as a both a Tenant Representative Agent and a Landlord Agent, these are the challenges both parties face in this size range and these are just some of the ways I’ve seen them come to a resolution.
Now, I know what you’re thinking: “If that’s the case, then I’ll just buy a building!!!!”
More on that next time….
Darin Shriver is a Commercial Restate Consultant at Beynon and Co. who has saved clients tremendous amounts of time through his understanding of the commercial real estate markets and negotiating nuances in the South Hills of Pittsburgh and Washington County, PA.