Commercial properties: Devil in the details corporate tenants must know
The commercial real estate space is quite dynamic and requires expertise in the leasing processes. It is clearly more complex than leasing a residential apartment. This segment of the market has its downsides at the moment. Its high vacancy rate, falling rents and oversupply make it a tenant’s market.
As at the end of the first quarter of this year, Grade A office space rents hovered between $500 and $800 per square metre, which is over 20 percent lower than the $1,000 per square metre price point that obtained in a few cases 2-3 years ago. But even at the present rent, it is still significantly high for a typical indigenous company outside oil/gas and finance.
Because rents have reduced and seem to have stabilized coupled with concessions offered by landlords, more firms are now ready and better positioned to lease some space in Grade-A buildings.
But most times, this ‘rush to grab it’ comes at a price. Many corporate tenants take leasing an office space for granted and end up making huge mistakes. They frequently fall victims of what they don’t know because they do not follow and understand due process.
There are, however, steps that could be taken to help minimize potential risks and other costly errors associated with this, giving what leasing agents hand out as “a list of top mistakes corporate tenants make when leasing commercial real estate”.
‘Beginning negotiation for a renewal or new lease too late’ is one of the biggest mistakes corporate tenants make. Waiting until lease expires before starting to speak to the landlord about renewal of the lease or before starting to look for a new space may leave a tenant with hard time finding exactly what he needs, especially in a competitive market.
‘Leasing an office space requires competence and expertise’, but many corporate tenants go into lease agreement process without properly having adequate and required knowledge and as such, they have made lots of mistakes that have impacted their business negatively.
‘Lack of knowledge combined with time pressure’ usually cause this class of tenants to make wrong location decisions without being aware of all the choices. This sometimes results in errors that eat into their profits and/or increase financial exposure. Experts advise that such tenants should either guide themselves properly or consider getting the services of a commercial real estate advisor to walk them through the process and confirm that a space will meet their current and future needs.
There is usually a lot of ‘documentation as well as clauses’ in a commercial lease contract that are mostly in favour of the landlord. That is why prospective tenants are warned of the lease clauses which they describe as “the devil in the detail”.
For this reason, it is important to understand what those clauses mean and how they can positively or negatively impact business. Most times a real estate advisor or a legal team can help a tenant understand these and negotiate clauses that will be more favourable to the tenant.
To avoid ‘the devil in the detail’, tenants should ‘focus on strategy and not on the transaction’. Whenever there’s need for a company to move to a new development or to renew their lease, in the excitement that goes with ensuring the transaction goes on smoothly, corporate strategy is often neglected.
All negotiations tend to focus only on the major financial terms of the lease agreement and as a result, the impact of the transaction on the portfolio strategy is easily forgotten. Important terms like rent review, expansion and contraction rights seem to have low priority in the leasing process.
In any new lease agreement, tenants are advised ‘not to underestimate the time the process will require’. The inability of corporate tenants to understand the time process required often results in companies having to stay longer in their existing premises and may negotiate a soft lease renewal with the landlord.
A ‘successful relocation transaction time process’ should include time for a site analysis and property selection, negotiation, executive approval, legal documentation, fit-out, relocation, etc. All these processes need to be completed within the remaining period of the lease and if not the landlord will demand compensation as entitled regarding the terms of lease.
CHUKA UROKO