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Business Problems With Real Estate Solutions: Bottom Line Management 1

Posted by Anne on May 15, 2019
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Bottom Line Management

Rents have sky rocketed since my last lease renewal.

With the strong economy and economic growth for the 10th consecutive year, along with the increased demand for space along Central Rt 128, rental rates in the area have increased an average of $5/SF since 2015.  This has left a lot of companies shocked when they receive their lease renewals or go to the market to look for new space.  The substantial financial impact of a $5/SF rent increase leaves many companies looking for relief and creative alternatives.

  1. Expand your geographic search:  Throughout this economic cycle, companies have placed location as a top priority, primarily due to the war for talent, and have refused to look outside of the Rt 128 belt for office space for fear of losing prospects.  However, we have recently seen companies explore options outside of the hubs of Waltham, Newton, and Needham for alternatives such as Lincoln, Dedham, or Natick for rent relief.  Rents in these secondary markets for a Class A office building average about $10/SF less for comparable product.  The key is to understand if your business can move outside the hubs and continue to retain and attract employees.  Though we typically suggest a discussion with existing employees on office space priorities, the most common requirements to retaining talent in a move entail: accessible transportation, minimal commute impact, local amenities, and an improved office space.  Additionally, these secondary market landlords may provide substantial tenant improvement allowances to help establish a space with your company branding and culture, improve quality of life for your employees, or provide additional office amenities to make employees excited about the move.
  2. Class B properties:  For those who are unable to move outside their current geographic area, moving from a Class A property to a Class B property can offer rent relief in the current market.  Many companies are realizing that the Class A amenities – cafeteria, fitness center, large common areas – are underutilized by their employees.  Therefore, rather than pay the Class A rental rate, which can be $5-15/SF more than Class B space, companies are taking the lower rental rates and utilizing their cost savings and Tenant Improvement allowance to build high-image office space with their employees’ requested amenities inside.
  3. Renew:  Though the Central 128 market is exceptionally robust, office vacancy still hovers around 10.3%.  As a building owner, the potential cost of vacant space or a buildout for a new tenant can sometimes be more costly than renewing an existing tenant at a below market rate.  For example, new paint and carpet alone is $3/SF, while additional offices are $7/SF.  Therefore, if you like your existing space and can keep it as-is for another long-term lease extension, a renewal provides the opportunity to receive below-market rents.  Note –review the options in the market prior to renewing to ensure that you are getting a competitive deal.  Finally, make sure your base years have been reset in your renewal to save on annual Operating Expenses.

For questions or more creative real estate solutions to manage real estate costs, please reach out to our Director of Corporate Services, Elizabeth Holmes – 508-655-5029.

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