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Strategies to Reduce Real Estate Cost

Robbie Baty • 8/26/2020

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:

  1. A "Blend and Extend" allows companies to renegotiate their leases to capitalize on a softening market and get rid of extra square footage
  2. Companies can sublease excess space to monetize unused office space
  3. 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.

Solutions to reduce cost

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.