Companies are seeking ways to control costs in today's economy. Real estate costs are typically one of the largest expenses for companies, trailing only personnel costs, so a reduction in real estate costs can have a significant impact on a company's bottom line.
There are three unique strategies to help them reduce their real estate costs:
- A "Blend and Extend" allows companies to renegotiate their leases to capitalize on a softening market and get rid of extra square footage
- Companies can sublease excess space to monetize unused office space
- Companies can “right size” or eliminate unused offices by terminating their office leases
Each company is in a unique situation, but regardless of the lease term remaining or rental rate being paid, its worth exploring potential alternatives for savings.
1. "Blend and Extend"
When a client has (A) excess space (10-50%), or (B) is paying above current market rents, a "Blend and Extend" is a creative option to reduce real estate spend.
- For Option A, brokers negotiate with the landlord to take back the excess space prior to the lease expiration, in exchange for an extension of the lease term.
- For Option B, when a client is paying above market rents, brokers negotiate to add term to an existing lease obligation at a lower rental rate, ultimately “blending” the higher older obligation with the new lower market rents to achieve the “Blend and Extend.”
COST RECOVERY PERCENTAGE: MEDIUM
TIME TO TRANSACT: 1 to 6 MONTHS
2. Sublease Excess Space
Subleasing excess space is one of the most common methods of maximizing recovery on unused space. Excess space is marketed in pursuit of finding a subtenant to pay rent on space that is no longer needed.
- The rent paid by a subtenant is typically at a discount of 50 to 90% of direct rates.
- Sublease space can be attractive for those tenants looking for quick timelines and fully furnished options.
- Typical downtime before finding a subtenant can range from 4 to 12 months.
- Discount rate and downtime are driven by a few key variables including submarket volatility, condition and configuration of space, furniture included, etc.
COST RECOVERY PERCENTAGE: MEDIUM to HIGH
TIME TO TRANSACT: 4 to 12 MONTHS
3. Terminate Lease
A client looking to completely eliminate a location will often pursue a termination. In this scenario, the client and landlord agree to an amount or a percentage of remaining rent to be paid in full by client, in exchange for the landlord releasing the client of all future lease obligations.
Landlords will account for a number of variables when determining this amount, including:
- Estimated downtime to find a new tenant
- Transaction costs for a new tenant
- Current market rents
Negotiating a termination while having already identified a tenant to back-fill a client's space is more beneficial for negotiation power than negotiating a termination amount without a prospect in tow.
COST RECOVERY PERCENTAGE: LOW
TIME TO TRANSACT: 1 to 3 MONTHS
For more information, contact a member of our Office Tenant Representation team.