By Ken Ashley
(ATLANTA) February 14th, 2011
No, we are not talking about your sweetheart on this Valentines day. Instead we are covering that other significant relationship in your life; your landlord. When tenants evaluated market opportunities over the past 18-24 months, most decided to remain in place. This behavior is described by real estate brokers and landlords as “blend and extend” because tenants usually have unexpired term
that they fold into the new extended term. Landlords made blend and extends easy because they were terrified to lose paying customers. Tenants were complicit and all too happy to stay because they were scared to move and commit to long lease terms. Plus it was all so easy; just stay and play.
As the economy turns, the decision isn’t so easy anymore. We are working with a number of companies now that are positioning for growth and have a newfound confidence about the future. The world is their oyster, and while they are cautious, that good old American cowboy optimism is beginning to return.
Should I Stay or Should I Go?
The benefits to taking a risk of a move can be substantial. You can improve morale with a new physical space, update your technology, and get that new carpet smell in one fell swoop. Executives use moves as the time to launch all types of new initiatives, both internal and external. Both employees and customers will see a reinvigorated company and its proud leadership in the new space.
Perhaps the biggest real estate opportunity is the ability to shuffle the deck in terms of how much space you take and where everyone sits (so called “adjacencies” by architects). We have seen many companies over the years make major reductions in their real estate obligation because they are able to “restack” and fit everyone into less space. Of course, many employees are now able to be mobile, so eliminating their permanent office space is a logical step. Every 10×12 office eliminated saves nearly $4,300 a year (at an 18% loss factor and at a $30 full service rate). Reduce by 10-12 offices over a 5 year term and pretty soon we are talking real money.
But It’s Such a Hassle!
Yes, it is a pain to move. The best thing this real estate broker had to do was to move his own office. Experiencing the problems and uncertainty with even the best planned move is certainly important for someone in my business. But here’s the thing; this is a short term problem, and once the move is over, you really enjoy your new digs.
I’m not necessarily saying that moving is right in every case. Renewing is still a very viable option in most every market. And even though some landlords are starting to get more optimistic, it is still a best practice to hang on to your tenants at any reasonable cost.
Back to the Future
Fortunately, this doesn’t have to be a gut call by management. There are some tools that can help you evaluate the move vs. renew scenario. Start with a space planner who can count all the butts in all the chairs and generate a “program” of your space. As you evaluate other spaces, the space planner will perform a so-called test fit to see how your program works in a potential new space. This will validate how you can use the new footprint and confirm how much square footage you will need to take in a new location.
Then, ask your broker to perform a full side-by-side comparison of a move vs. a renew. Include the space, of course, on a full service basis, but also add in the cost of technology and furniture in both the new space AND in your existing space. Will you require any renovation of your current space if you stay? Will you buy a new phone system or computers? Everything needs to be in the model.
Then review things with accounting on an after-tax basis. If you are publically traded, you will likely “straight-line” free rent and other concessions on an equal basis over the term of lease. Working with your CFO, determine success metrics such as impact on a earning per share basis.
The Holy Grail
As one of my sons would say, “so here’s the thing.” We are not doing all these real estate gyrations just to save a few sheckles on your rent. At the end of the day, the so called Holy Grail corporately is increased productivity. If you can reduce cost by 10%, congratulations. But I bet that pales in comparison to a 5% increase in productivity, or sales, or whatever “offensive” goal you have for the organization.
We contend that too many executives get caught up in saving money and forget the reason the real estate is there in the first place, which it to support the business enterprise.
Our advice is to take an honest assessment of all of the possibilities in a move vs. stay scenario and don’t forget the reason you pay rent every month. View your space as a competitive weapon as opposed to an expense and you will succeed every time.