The Space Race

Strategies

In Pittsburgh, marketer John Brady found a dream office—at a savings of 25% per square foot. In San Jose, Gary Gemoll signed a lease that shaved 20% off his costs, while giving his accounting firm room to grow. In Charlotte, N.C., commercial printers David Pitts and Bill Gardner struck a deal that will save them $400,000 over the next five years.

Welcome to what may be the most tenant-friendly commercial real estate market in a decade. Nationwide, office vacancy rates have almost doubled over the past two years, sending asking rents down about 12%, according to Torto Wheaton Research in Boston. Factor in now-common incentives like improvement dollars and several months of free rent for new tenants, and they are down as much as 30% in many markets, according to Grubb & Ellis, a real estate services firm.

It's one of the few upsides of the down economy—unless, of course, you happen to be a commercial landlord—and a prime opportunity for business owners, whether you're looking for swankier space or cheaper rent.

Consider John Brady. His 40-person marketing firm, Brady Communications, had outgrown its 11,000-square-foot headquarters so much that Brady, 49, was sharing his own office with an assistant account manager. So when he learned that a nearby advertising agency was relocating, Brady stopped by for a look. He liked what he saw: 19,000 square feet already designed for a creative-services company; plenty of windows; a kitchen; meeting rooms; even a coffee bar. "Very impressive, but very expensive," Brady remembers thinking. "Out of our league."

In fact, not only did the space cost about 25% less per square foot than the firm was currently paying, it came with the previous tenant's furniture—a perk that saved Brady Communications some $350,000 in renovation costs. "We were surprised at what we could get," he says. "We didn't think the market would be so negotiable."

Indeed, many tenants are finding that nearly everything is on the table— from rental rates to lease terms to the size of the security deposit. When Gary Gemoll, chief operating officer of Berger/Lewis Accountancy Corp., needed to consolidate 45 employees from two San Jose, Calif., offices, he was astonished at the leverage he had. In many cases, there was no fixed asking price: landlords were willing to consider almost any offer. "We were really in the driver's seat," Gemoll says. "It was just a question of what we wanted to go after."

Here's what he got: an eight-year lease for 12,000 square feet in a downtown San Jose high rise—with tens of thousands of dollars in tenant-improvement incentives to pay for remodeling, as well as reduced rent for the first several months of the lease. Gemoll figures Berger/Lewis will save 20% a year in rent and facility costs—while gaining the capacity to grow by some 25% in staff. "It's a buyer's market," he says.

And you don't necessarily have to go through the expense and headache of relocating to get a deal. "I don't think landlords are any less aggressive at renewing existing tenants," says Mark Ritchie, CEO of Ritchie Commercial Real Estate in San Jose. While renewals are less likely to include improvement dollars or months of free rent, you may be able to negotiate a nice break on your monthly tab. The key, notes Ritchie, is to let your landlord know you're shopping around before renewing. "Even if you're not in the mood to look at space, just do it," he says. In many markets, that'll be enough to strengthen your hand at the bargaining table.

Even if there are several years left on your lease, it can't hurt to ask for an early renewal. Pitts and Gardner, co-owners of Classic Graphics, a 140-employee commercial printing company in Charlotte, N.C., had 22 months left on their lease when they received a cold call from a real estate services firm, which said it could negotiate a better deal. They weren't kidding. Classic Graphics just inked a new five-year lease that includes a 15% reduction in rent, four months' free rent, and $28,000 for building improvements. The landlord even refunded a $10,000 security deposit he'd been holding since the company moved in nine years ago, Pitts says.

The new lease will help Classic Graphics weather an 18% drop in sales over the past two years and allow it to make some long-needed capital investments. "This makes a big difference, cash flow­wise," Pitts says.

Of course, real estate is a profoundly local market, varying by city, submarket, type of space, and local market conditions. Ultimately, those factors, not national averages, determine what is available. And larger customers tend to have more leverage, with most of the benefits going to outfits with at least 40 employees, says Robert Bach, national director of market analysis for Grubb & Ellis.

Whatever strategy you pursue, keep in mind that in commercial real estate, "there's no such thing as a standard lease," says Janet Portman, an attorney and co-author of the book Leasing Space for Your Small Business. "It's really all about power," Portman says. "And power depends on the market."