The Reata BizBlog

If you are considering buying a building or doing a build-to-suit, you can add an extra few months to 18 months to your schedule. Buying a building can take extra time because you may have to get a zoning change and a change in use may trigger compliance with "grandfathered" codes. For example, if you convert a day care building to an office use, that may trigger the requirement to install a sprinkler system. If the building had been used for another day care, no sprinkler may be required.

Once you start talking about ground-up construction as in a build-to-suite (BTS), you can easily add 18 months or more to the schedule. That's because you may have to create and file a plat, change the zoning or get a variance, create and submit plans for city approval, and then construction, of course. And this construction isn't like interior construction. Now you have rain, snow, cold and heat to contend with and they cause delays.

None of this is intended to scare you off from your intended project. It's just to reinforce my first comment - START EARLY.

The blog post below offers some good advice on how to get the best deal on your office lease. The one thing he says that I don't totally agree with is that you get a better deal for a longer lease. While that's true if you are comparing a 1-year deal to a 5-year deal, I don't think the same can be said for a 3-year term versus a 7-year term. Most landlords in the Dallas, Texas area expect to see some rental increases throughout the lease term so the longer the term, the higher the rent may go. But you also may get more free rent for the longer term. So on an average effective rate basis you may see the same or even a slightly lower rental rate in some cases, but not always.

      Start early.  Many companies wait too long before starting the process. Landlords know they don't have to be as competitive if you don't have time to shop around. Let's say you approach your landlord 2 months before your lease expires. He knows that you don't have time to go search the market for other options, negotiate with those landlords, get a lease signed, get construction finished, get an internet connection set up and move in that amount of time. 

       Fewer options - higher price. So guess what? Instead of offering you a competitive rental rate that should probably be lower than what you had been paying (at least right now in this tenant's market), he quotes you a rate equal to or even higher than what you have been paying. Now your only option is to stay where you are or hope you can find a space already built out to a configuration that works for your needs.

      So start early. This provides plenty of time for negotiating leverage and wiggle room. The process always takes longer than you expect. Allow a generous amount of time for unexpected delays in the leasing process. Holidays, business and personal travel, changes in personnel, and building sales are only a few of the things that can significantly delay the lease. Our average transaction takes 5-6 months from the date we are engaged. It can take far longer in some cases and occasionally can be much faster, but 5-6 months is a good time frame for planning.

      Of course, engaging a professional tenant representative to search and negotiate on your behalf is the best way to ensure the process goes smoothly and your goals will be realized. For more information on using a tenant rep, please go to my website.  

If they are correct, it's time to lock in the current low rental rates before landlords decide it's better to wait for higher rents than to do your deal. Here is a link to their article - http://www.costar.com/news/Article.aspx?id=195F06A0749794A8335951CD840A973E.

How can foreclosures be good for anyone? Surprisingly though, foreclosures create an opportunity for tenants. I wrote an article about it that was published in today's Dallas Business Journal - http://dallas.bizjournals.com/dallas/stories/2010/06/14/smallb3.html.

This article (http://www.globest.com/news/1600_1600/newyork/183576-1.html) is talking about the New York City office market, but you could just as easily substitute Dallas in place of New York. Yes, the market is bad for landlords. Yes, tenants have lots of choices and rents have fallen while concessions (free rent, etc.) have increased. But certain submarkets are doing pretty well. Certain buildings have pretty good occupancy. So in those cases, the deals don't look as good and tenants are left questioning why the landlord isn't more aggressive. So you should shop widely when looking for space. And if you really just want to renew where you are, be sure your landlord thinks you will seriously consider moving.

It's good to live in Texas.  Those jobs create demand for office & warehouse space. And it will eventually change the balance of power in negotiating leases if it becomes a trend. So you might want to consider renegotiating your lease now before landlords start feeling confident of a recovery with jobs. We recommend that anyone with a lease expiring in the next 2 years evaluate their situation with their corporate real estate advisor (tenant rep) to decide when is the right time to take advantage of this depressed market.  Read the article here -http://dallas.bizjournals.com/dallas/stories/2010/02/08/daily4.html?ed=2010-02-08&ana=e_du_pub.

DFW office leasing is doing much better than other US cities. But even within the DFW area, there are winner and loser submarkets. Northern suburbs like Plano and Frisco will always do better because they are close to where people want to live.  The key is to have this information when negotiating a new lease or renewal.  That is the kind of information that a corporate real estate advisor (tenant rep broker) follows and will use to effectively negotiate on behalf of companies.

One of our clients is a French software engineering company that just opened an office in Plano, Texas - a suburb of Dallas.  We negotiated a sublease for them and were able to get full use of all furniture, cubes, phones, computers, copiers and even the server room equipment, all while also getting a huge discount off the market rental rate for the building.  Take a look at the article at the following link - http://www.ccbusinesspress.com/display.php?id=3936.

A report from Cushman & Wakefield reported that DFW office occupancy fell by 2 million square feet in 2009 and total leasing activity was down 43 percent.  Not surprising given the current economic situation, I know.

But like in most cities, there are winners and losers within the greater metropolitan area.  Buildings along LBJ Freeway and downtown Dallas were hit hard with lots of tenants moving elsewhere or just closing their doors.  The big winners were Plano and Frisco because those submarkets are close to where people live.

Quoted rental rates didn't change much though.  This seems odd when demand is so low.  You would think rents would be lower.  Well they actually are, but landlords prefer to give free rent and higher concessions to "buy down" the rental rate than to reduce the face rate shown on the lease.  So the average effective rental rate is lower even though the number shown on the lease is higher.  This allows the landlord to get the pain of the current market out of the way and then have good rents in the future.  This also helps them if they decide to sell the building in the future because the buyer won't have to deal with the free rent which should have burned off by then.

So what does this mean for companies whose leases expire in 2010?  

First, there should be lots of options from which to choose.  So allow yourself plenty of time to look around and negotiate.  I recommend that you start the process 3 months prior to the date on which you have to exercise your renewal option.  If you don't have a renewal option, start 9-12 months early.  That may seem like a long time, but if you move to a space which requires construction, you can eat up 9 months in a hurry.

Second, you should shop the market to see what's out there before blindly agreeing to renew your lease with your current landlord.  You wouldn’t buy a $40,000 car without shopping around a little first.  So don’t sign a lease which totals $500,000 or more without shopping either.

Third, you might want to consider trading up to a higher-quality building if image is something that might increase sales or allow you to hire better employees.  Or you might be able to move to an area close to home or close to customers.  Who knows, the landlord may pay for some or all of your move.

Finally, hire a corporate real estate advisor (tenant rep).  When I was a landlord, I found that landlords could get a 10-20% better deal for themselves when tenants handled their renewal directly compared to those tenants who were represented by a tenant rep. Don't hire any broker though.  Only hire one who specializes in representing tenants exclusively.  If the broker also represents landlords, you might find yourself in a situation where the broker is trying to juggle his loyalties to you and the landlord.  You don’t want to have to question your broker’s motivations or recommendations.

Have a great 2010 and happy hunting.