Right now, finding a good deal on a new location for your business, or improving the one you already have, might be the smart move
During an economic slowdown, many small businesses pore over their top-line expenses, looking to cut any fat out of their operating costs and overhead in order to keep their company afloat and buoy their profits. But all too often they ignore their literal overhead-the roof above their heads and the square footage below their feet-and in the process miss a great opportunity for both short-term cash flow gains as well as long-term growth.
The Landlord-Tenant Relationship is a Two-Way Street
It's important to recognize that just as much as you need a location for your business, your landlord also needs businesses like yours to fill his or her building. It's a business relationship. Without each other, neither will be successful in the long run.
So, with that in mind, it's imperative that you keep your landlord abreast of major changes in your business's financial situation. It's never a good idea, for example, for a landlord to first find out about a tenant's negative cash flow situation because of a bounced check or missed payment. By that point, you've burned up a lot of your goodwill and injected an unhealthy dose of doubt into your landlord's impression of your company's reputation. That kind of damage can take years to repair.
Instead, it's better to sit down with your landlord early on if the scuffling economy has your business struggling to pay the bills. Even if your lease isn't up for renewal for several years, most landlords will still agree to sit down and discuss renegotiating the terms of a lease with a company that is having a hard time keeping its head above water, even if only temporarily. This is especially the case if, for them, renegotiation means the difference between keeping and losing a tenant. After all, discounted rent is better than no rent at all.
Another Advantage: It's Still a Renter's Market
Keep in mind that the broad slowdown currently affecting the U.S. economy has hit the commercial real estate market particularly hard; meaning your landlord is probably not too keen to lose any tenants right now. Since 2007, nationwide vacancy rates for U.S. office and industrial buildings have been increasing every quarter, reaching 16.3 percent by the end of 2009 according to reports from the National Association of Realtors. And although the rate of office vacancies has slowed recently, analysts from CBRE Econometrics Advisors expect this trend to continue well into 2010 and bottom out at a near-historic 18.6 percent before improving moderately in 2011.
Moreover, in many areas of the country, including southern California, southern Florida, Phoenix, and Las Vegas, vacancy rates have jumped even further, to levels not seen since the beginning of the decade. If you add in new and not yet completed commercial construction projects to this total, it means that some areas of country now have the equivalent of one in five business locations sitting idle.
Despite this, statistics still show that the most obvious lease negotiation request from the tenant's point of view-lower rent-is also one of the least likely points of concession by landlords. For instance, surveys show that while retail and industrial vacancy rates were skyrocketing in late 2007 and 2008, the average asking rent still continued a slow but steady uptick despite the growing glut of available office space. It wasn't until last year that commercial rent rates finally peaked and began to adjust to the the excess supply of office real estate. For the rest of 2010, analysts expect further rent decreases as the market pulls back to better match diminished demand, with declines estimated to average around the three-percent mark.
Of course, like most businesses, landlords would still prefer to raise prices than lower them and so, even in bad times, they will often agree to rent decreases only as a last resort. As a result, an unhappy tenant may get some relief from their current landlord if they play the role of squeaky wheel. But if your current landlord is uninterested in changing your lease terms or if your business has outgrown its current space, now is a very good time to shop for that better, larger location. Landlords, particularly those with a brand-new building to fill, have shown they are quite willing to lure in new tenants with sweetheart deals, sometimes offering very affordable, long-term leases or even charging zero rent for the first few months.
Know Your Circumstances, Test Your Leverage
Even if your small business is quite content with its current situation and location, it's still not a bad idea to sit down and talk with your landlord about both the future of your business and his. Before this meeting, however, you should have an internal discussion to identify and clarify your business's long-term goals relative to your location. From this, you can derive a list of topics to bring up with your landlord that go beyond rent. But why should you want to discuss your landlord's financial health as well, you may ask? Well, the Congressional Oversight Panel-the watchdog agency tasked to oversee the financial bailout-now estimates half of commercial real estate mortgages will be underwater by the end of the year. That's a sobering statistic. So, from a tenant's perspective, it makes even more sense to stay abreast of potential changes to your building owner's status so you can keep your leasing options as open as possible, lest you wake up one day to find your overleveraged landlord has suddenly gone belly up or been forced to sell off the building you occupy to a new, unfamiliar owner.
Many times, these frank discussions with your landlord will prompt him or her to address long overdue maintenance issues or agree to technology upgrades or other modernization efforts. Some typical capital improvements worth bringing up might include new carpeting and fresh paint in your offices, setting up a high-speed Internet connection or Wi-Fi hotspot in your building, or even something as simple as reserved spaces for your company employees in the building's parking lot. Sometimes, landlords will agree to shorten the length of a lease contract or amend it to waive penalties for early termination to please a balky tenant. These later concessions are attractive from a tenant's standpoint because they provide businesses more financial flexibility in the long run. Landlords, on the other hand, don't object to these types of concessions as much because they don't involve offering steep discounts on the monthly rent.
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