For a company with an expiring lease, it is worthwhile to appear on the market, not only in order to find a better offer: When renegotiating the terms of a lease, one’s negotiating position is significantly better if the landlord is clear on the fact that the company has appeared on the market as a potential tenant. With a more favorable offer at one’s disposal, it is easier to find a landlord’s weak spot and, obviously, a thorough understanding of the current market also secures an advantageous position during negotiations. It is enough to simply hint at one’s interest in the market as the information is guaranteed to get back to your landlord.
2. Tenant incentives
The rental rate that is offered and the effective rent (the rate agreed upon following negotiations) could significantly diverge, by as much as EUR 1-2. It is worth being clear on the fact that there is only a minimal added value in the currently valid effective rent levels. Bargaining is possible, but do not expect miracles. Discounts of several Euros would cut into the renters’/owners’ profitability. The deal itself is, of course, always dependent on the building and certain landlords have more, or less, room to play with concerning rental fee reduction. Competition, however, forces landlords to come up with an increasing number of tenant incentives and, in reality, this is what gives tenants an opportunity to reduce the total costs associated with office rental. (See box for details.)
3. With or without an agent?
Office rental fees always make for a significant budget-line item within a company’s administrative costs and a new lease determines the life of a company for a long time. It is no question then that a new rental property must be chosen with great care and expertise. In the case of an average company, it is most rare to find someone with sufficient real estate expertise within one’s staff. Therefore, it is worth leaving the job to the professionals. These days, using the services of a real estate consultant is practically unavoidable given the fact that the largest developers and office building owners also use rental agencies to find tenants.
The more complex a tenant’s requirements, the more worthwhile it to consider signing a tenant representation contract. Advantages of tenant representation are finding an office space specifically optimized for the tenant’s needs and creating an optimum lease. If the agency is also in charge of renting out the spaces in the office building too, it may have a conflict of interest since, in this case, the agency profits based on the rental rate settled. However, once a tenant representation contract is signed, the agency will represent the tenant’s interests exclusively. Under the auspices of a tenant representation contract, the agency, in addition to choosing a suitable office space, also cooperates in negotiating the lease and operating contract and promises to secure the most favorable conditions for the tenant.
Tenant representation may also extend to the tasks of arranging interior office spaces and relocating project management and agencies may also be on stand by for technical “due diligence.”
4. Location
A fundamental consideration when choosing a location is the accessibility to the office building by car or public transportation. It really depends on the type of company as to which kind of access is better. For a call center, probably public transportation makes more sense. Yet, a company with a large fleet of cars, most likely the former is preferable. Above and beyond accessibility, the most important implication of location is its prestige. It is worth clarifying before deciding on an office building whether the building’s environment, specifically the given neighborhood, suits the company’s profile and image.
5. Space is not everything
Tenants don’t pay rent just for the areas they actually physically occupy. Rent has to be paid for the so-called “shared areas” (hallways, stairwells, etc.). The same goes for operating costs, too.
6. Technical parameters
Rent is but one parameter to consider when choosing an office building. The most important consideration is what kind of price/value ratio one will receive in exchange for a given rental fee. The basic goal of an office building is to provide an effective working environment and the tenant is justified in expecting a building that operates cheaply and effectively, as well as providing high quality ergonomics.
7. Operating: Devil in details
However, the average tenant is not at all clear on what basic technical parameters need to be demanded in order for the office building to really operate well and for their employees to truly feel comfortable in the given building. The operating contract is treated by the majority of tenants as a boring appendix to the rental contract. Few consider that tenant satisfaction is largely influenced by the quality of the office building’s operation. Just think of the interminable wait for repairs, unsatisfactory cleaning services, the constant turnover of the reception staff, burnt-out light bulbs unchanged for months - all these determine employee satisfaction on a day-to-day basis. By carefully defining the terms of the operating contract and specifying details that protect the interests of the tenant, one can protect oneself from a number of misunderstandings and annoyances and ensure better and more opportunities for long-term negotiation and cost reduction.
8. Cost control
In the case of an A-category office building, operating costs come to EUR 3.5-4 per square meter and while there is not much of a chance to reduce this well thought out fee, it is worth examining cost-saving or quality-increasing opportunities in this area. It is important to clarify what a fee contains, what costs it includes, what additional costs may come up, how the operator handles the service sources at his disposal, and what level of services the given fee pays for. Larger tenants may have an opportunity for some degree of control concerning their operating costs. For example, it may be specified in the operating contract that the landlord may only raise the cost of fees directly in the landlord’s control (i.e. security, porter service, gardening services, etc.) at the rate of inflation.
It is worth considering what level of service one needs because, otherwise, only pointless costs arise: A fitness room and three reception desks sounds good, but these extras really increase operating costs.
9. Year-end surprise?
The estimate of operating costs, and monthly bill, is generally provided to the tenant as an a pre-calculated average, with a correction provided at the end of the year. It is worth remembering that low-operating costs are treated by landlords as a potential competitive edge and so they are liable to underestimate the expected costs. So, it may turn out that the tenant gets a surprise at the year-end tally. To avoid unexpected additional costs, it is worth looking behind the numbers: How realistic and tenable are the costs included in the monthly average?
10. Worth going green?
We would love to propagate the notion of “going green” but, all things considered, we must not forget that it is not the “green,” environmentally conscious concept that offers tangible benefits for us at the time being but, rather, low operating costs. For this, one does not necessarily need the “green” concept but instead a modern, effectively-operated office building.
11. Subletting on the office market
The option of subletting (leasing out areas that are unused and empty within a space which one currently leases) provides opportunities for both tenants and landlords. On the office market, leases are generally signed for fixed terms, so, tenants do not have much opportunity for terminating or adjusting them before the agreed term is over.
This factor may become a vitally important consideration in the coming days, as a number of companies will be forced to reduce their workforce and implement emergency cost-cutting measures. With space rationalization, the tenant has an opportunity to redistribute their staff and sublet larger contiguous spaces. Those willing to sublet are, generally, also willing to make further compromises.
Thus, as a tenant of these sublet spaces, one can sometimes obtain significant discounts and, as landlords, one can also utilize their empty office spaces. Subletting on the Budapest office market remains rare for the time being. However, it is likely to become more popular in the coming period and it’s worthwhile to hunt for these opportunities.
12. Associated deals
With increasing competition comes also more complex, associated deals. These will probably also gain prominence on the office rental market soon. One typical example of this is when a landlord nets a potential tenant by buying their old office building. The tenant is, thus, able to quickly free up their property’s capital.
TENANT INCENTIVES
Rent-free periods have long been a tenant incentive and have gained popularity during this period of intensified competition. Instead of the previous customary few months, one could negotiate as much as six, rent-free months into their agreement.
The practice commonly used in London, considered one of the most mature real estate markets in the world, is a good indication of how important an element the rent-free period is in the landlords’ arsenal of tenant incentives. In the current situation, it is not rare that landlords offer a two year rent-free period in exchange for a 10-year office rental contract. In fact, the length of the rent-free period has tripled on London’s West End submarket over the past 12 months.
Arrangement approval - landlords generally assume a standard office space arrangement upon arrival of a new tenant, but unique requirements and client-specific arrangements mean additional costs to tenants. Under normal circumstances, this shows up as an item costing several million. Under the current market conditions, however, landlords will gladly take on the additional costs in the interests of keeping the office building occupied for the long-term. The amount invested by the tenant could even drop down to zero.
Above and beyond these costs, landlords are ready to accept further cost burdens from their tenants and offer additional services, such as; paying for the cost of the move, organizing and executing the entire relocation procedure, or paying for the costs associated with migrating one’s IT infrastructure. Flexibility in the terms of the lease - Landlords are showing more flexibility in this area as well and this reveals itself as a tangible, quantifiable, advantage to the tenant. In the case of A-category office buildings, instead of the traditional five years, landlords may be willing to sign contracts for three, or three-plus-two (with additional options) years and are willing to include specific termination options into the lease. It is worth remembering that the shorter the term of the lease, the less flexible the landlord will be - regardless of market circumstances - since their risks.
IMPORTANT DETAILS
Is there a suitable parking arrangement? Is there guest parking, in addition to employee parking?
What kind of services can be found nearby? Is there a restaurant in the building? A bank? A post office?
Can a separate reception area be created (or, perhaps, an entire building section partitioned off)? What kinds of extra costs would this entail?
Is it possible to put the company logo on the building? Is the underground garage adequately large enough? (In the case your company hosts prestigious mangers and guests:) Is there space for bigger cars? (Let us not forget that it is rather awkward if we carefully choose an office and then, the day after the move, the big boss scratches his luxury car.)
