For many tenants, it makes more sense to lease than buy. Right now, the marketplace has some hot deals.
Deciding whether your business should lease a space or buy its own comes with plenty of questions. Is there enough capital for a large upfront investment? Will the business outgrow the space in five years? Will the market decline during the lease term?
If the answer to some or all of those questions is yes-or even maybe-leasing that new office or warehouse may be a smart move. But even after you decide leasing is the best option, you've still got more questions than answers. Picking the best location, a helpful landlord and a competitive monthly rate can be daunting, especially for executives who aren't used to handling real estate decisions.
"We don't have a special department that handles these activities," says Scott Blaine, director for Panasonic Automotive Systems Company of America in Columbus. "We're sales guys. We're not really taking care of real estate. We depend on [an agent] a lot because we're small and we don't have those resources."
From utilizing online searches to scoring price flexibility, local agents and brokers have plenty of advice for businesses shopping for a new home.
In the Internet age, more and more lessees begin their commercial property search online. "We find that tenants begin looking by going to their favorite search engine and they search for whatever they're looking for. We strive to have not only our company website, but our individual listings, come up as high as they can," says Matt Gregory, office sales and leasing agent for NAI Ohio Equities.
Potential clients have online access to information about each available property, including type and class, size, location and agent, Gregory says. Tenants can even flip through photos and scan a map of the area.
Ohio Equities also registers unique web addresses for many of its properties. For example, www.pncplazacolumbus.com lists building-specific information: available suites, parking, maps, bird's-eye aerial photographs, local amenities and traffic counts. "I find that the most popular link is the floor plan for any particular property," Gregory says.
Continental Realty's website includes property listings and real estate databases that track commercial properties in the market. Tenants can search by several categories, including location, space available and lot size. But despite the array of online information, most clients still rely on brokerage services, says Cory Kooperman, vice president at Continental Realty.
"Most tenants are being represented by a commercial real estate agent. In this day and age, there's so much information on the Internet that they do try to Google, but they don't know how to interpret some of the information ... so they rely on brokers to educate them," she says.
CB Richard Ellis also lists all of its available properties online, but Robert Click, senior managing director of the Columbus office, says most tenants still call an agent first.
"Perhaps a small, independent business might look in the newspaper or online. In general, a sophisticated tenant would go to a broker in their search," he says. "The truth is, they don't have time to search or the market knowledge to know what's available, what's good and what's bad. The time it would take to educate themselves is wasted."
"If they have a good relationship with a broker, they will just pick up the phone and call," Gregory says. "Our goal is to give whoever's looking as much information as possible. The traditional sales approach is to give them enough information to get them to call. In today's age, if you don't give them all the information, they'll skip over you," he says.
As tenants search properties, they should keep the business's needs and desires in mind. "What is the model of your business and does the building suit your business? Does it matter that you're not on the first floor directly in front of the entrance? Does it lay out the way you need it to?" asks Jaimine Johnson, director of commercial property management for DRK and Company.
"It varies based on type of business," Johnson says. "If you're a call center, you're not getting a lot of foot traffic. If you're an insurance agency, you need walk-in accessibility."
Finding a Good Fit
Agents point out several things tenants should keep in mind about potential spaces. First, there's the old adage: location, location, location. "Proximity to competitors, to clients, where their employees live in the area and what type of demographic," Kooperman says.
Location also ties into corporate image. Large law or accounting firms might want space Downtown, while advertising agencies might want to entertain clients in the Arena District, Kooperman says.
On the other hand, finding a place that meets any special needs is critical. "Every tenant's need is unique, but there are some that are exaggerated," Gregory says. "Is there something that's going to differentiate their need from the typical tenant?"
For industrial businesses, the most important factor might be high ceilings. "Certain tenants need a height of 28 feet, because they rack what they store there," Click says. These businesses also might need easy access to highways and railroads.
Brokers advise tenants to start shopping at least six to nine months before their lease expires. Solut!, a light manufacturer of paper-based food packaging, started looking a year in advance. The company, which was outgrowing its 20,000-square-foot facility, found a space that was twice as large with both industrial and office areas, says Scott Rechel, the company's president.
"We were looking for what best fit our needs, a combination of electric and shipping and receiving, as well as a landlord that was committed to making the necessary adaptations to those needs," Rechel says. Solut! relocated in April 2009.
Other industries have different requirements. In retail, traffic patterns can be important. Which side of the road is more accessible for customers? Is there a stoplight that provides easy access, or is it difficult to maneuver to the prospective location?
For some types of office space, proximity to other businesses may be key. "If you're an attorney and do a lot of work in the courts, you might want to be close to the county court building," Click says. "If you rent medical space and practice through one of the hospital systems, you might want to be close to that hospital system."
Other considerations include a building's visibility, restrictions on signs, number of windows, lobby access, how far a suite is from the main entrance, parking and potential co-tenants.
"Technology tenants like to be near each other. Graphics and creative users like to orient toward each other," Gregory says. "But you wouldn't want, if you're a lawyer or dentist, to have another lawyer or dentist right next door. You wouldn't want a tenant next door that's going to create a nuisance from noise, traffic or type of clientele."
Culling the List
After narrowing the prospects, the next step is to visit properties. "The first impression should always be good. That's ultimately what the clients' and employees' first impressions are going to be," Gregory says. "That includes the first impression of the building, all the way to walking into their suite."
While touring each space, tenants should ask themselves how well the floor plan fits their needs. Panasonic, an automotive electronic supplier, needed space for both engineering and sales activity, Blaine says. Executives called on Ohio Equities in March 2009 when their 2,200-square-foot facility was getting cramped.
"We wanted to stay in a certain area. We needed a garage, but we needed a professional office environment, too," Blaine says. "The garage limited us, so we were able to narrow it down very quickly to a couple of spaces."
Panasonic wanted an open layout with a few conference rooms and offices. "We were looking for something that met those needs, either that the company was willing to work with construction or something that was already set up in that way," Blaine says.
Of two potential spaces, one landlord was reluctant to make any big changes. So Panasonic chose the other, moving into the 4,700-square-foot space on Sawmill Road in March.
"Ideally, you should find three properties you could see yourself going into before going into the process of negotiating terms to see what each of those three buildings has to offer," Gregory says.
The recent recession has brought good deals for businesses looking to relocate. Rental rates for office space have dropped both in downtown Columbus and the suburbs. According to CB Richard Ellis, Columbus rates are down to an average of $17.43 per square foot in first quarter 2010, from $17.68 the previous quarter. Suburban rates decreased from almost $17 to $16.65.
In the suburbs, the highest average asking rate is $19.20 in Polaris; the lowest is $10.60 in Reynoldsburg. However, Columbus industrial rates are up 7 cents to $3.64 from fourth quarter 2009. Average asking rates for industrial properties were highest in the northeast ($5.45) and lowest in the southeast ($2.80). Most activity has come from renewed or renegotiated leases, CB Richard Ellis reports.
"A lot of tenants are renewing even when they're not close to expiration. They might have two years left and will try to get a landlord to lock them in at a lower rate," Gregory says. "Some will want to lock them in, but some will take their chances on what the market will be like in two years."
"This is still a tenant's market in most every property type," Click says. "It's an excellent time for tenants to negotiate or renegotiate their leases. There's still a surplus of space in most categories. Space in downtown Columbus is leasing for less than it was 20 years ago, and that's not even taking inflation into consideration. It's leasing for less actual dollars. It is extremely competitive, so landlords are flexible with the way they create deals."
Such a favorable marketplace might motivate some lessees to save themselves a broker's fee and hammer out a new contract on their own. Look before you leap, brokers advise. "There are so many different parts to a lease negotiation that sometimes if you don't have the right representation, some of it will fall through the cracks," Gregory says. Negotiations can include a few months of free rent, rent hikes, caps on operating expenses or even right of first refusal on contiguous space.
In the end, of course, all these negotiable items-including price-depend on the particular space and its landlord. "There's a lot of rumor out there that dollars are flexible, but it's economically driven," DRK's Johnson says. "Let's say a tenant needs a $150,000 build-out and he wants an $8 rate and 10 months free. If you take that from every angle, it doesn't make sense for me to do the deal because there's not enough there for a win-win situation for the landlord and tenant."
"Flexibility varies from landlord to landlord and building to building," Gregory says. "The perception is that every landlord is hungry, but that's just not the case. It depends on every individual landlord. How full is the building? How overleveraged are they in financing? How much money is in reserve to do a build-out? All of that factors into how aggressive they are in negotiations."
While some landlords are aggressive and dole out deep discounts, others stand firm behind the value of the space. Tenants won't know which type they're working with until they make an offer.
"It just depends on how much vacancy is currently in that facility. You have markets like the Arena District and Easton that have really low vacancies, so they have some of the highest rents," Kooperman says. "A lot of buildings Downtown have a lot of vacancies, so those rents are lower."
Both Blaine and Rechel say they scored competitive rates on their new spaces, helped in part by the current state of the market. "We talked to one landlord who was a property owner who was really fascinating. He was bullish about his properties. He did not want to discount the rate because of the economy, because he was confident that it would turn around quickly," Rechel says.
That landlord was banking on his inventory becoming more popular due to the slowdown in new construction. "That building was still vacant a year later," Rechel says.
Instead, Solut! signed a five-year lease with DRK, which also owned the company's previous space. "At the end of the day, the biggest differentiator was the fact that our landlord took the time to know and understand our business, and that was the most critical part of them presenting a package that worked for us," Rechel says.
Lease length also has been affected by the economy, Johnson says. "I used to be able to get a seven- to 10-year lease, and now I'm getting three to five. People are intimidated by commitment, but what they should do is capitalize on that and get a slightly better deal," she says.
Smaller businesses often go for shorter terms, Click says. Leases generally run for three, five or 10 years in the office space sector. "Over the last 18 months, many businesses were postponing decisions on lots of short-term leases just to get through the economic period to determine what was going to occur," Click says. "We saw an anomaly in the last 18 months. In the long haul, leases have not and will not change. As landlords commit dollars to improvements, they have to make sure they will recover those dollars, cover operating expenses and have remaining money for return. If they put money in the space, they have to make sure the tenant will be there long enough to recover that."
Ultimately, commercial leasing comes down to three main components for the tenant, says Gregory: quality, quantity and price. "They can have two of those three, and the market will drive the third," he says. "If they want a new building in a prime location and a lot of square footage, the cost will be high. If they want that same building, but at a low price, then they need to find a smaller size." In other words, tenants have to know what they want, what they need and what they can live without.
Michelle Davey is an editorial assistant for Columbus C.E.O.
Reprinted from the July 2010 issue of Columbus C.E.O. Copyright © Columbus C.E.O.