Lowering Office Space Costs: Seven Cost-Saving Tips for Firms Considering Relocation or Lease Renegotiation

Office space costs are usually a company’s second or third largest expense. Lowering office space costs will significantly impact a firm’s profitability. Below are seven cost-saving tips for firms considering a relocation or lease renegotiation.

1. Start the Process Early

The tenant benefits greatly by having enough time to evaluate his options, create a competitive bidding environment, and structure a satisfactory transaction. Unfortunately, tenants too often wait too long before they start the process, even when counseled otherwise. The smallest tenants should start their space search at least six months before their lease expires. Most tenants should start 12 to 18 months prior to the expiration. The largest users should evaluate their options two to three years before the expiration of their current lease. Starting early allows for thorough market research, time to visit multiple properties, and ample negotiation periods to ensure the best terms and conditions.

2. Use a Space Planner to Identify Savings Through a More Efficient Floor Plan

Before tenants evaluate buildings for relocation or renewal, they should complete a space plan with an architect or space planner to identify the optimal space size and configuration. Space requirements are not static, and the space leased several years ago may no longer be the optimal size or configuration. A space planner can identify opportunities for savings with a more efficient floor plan. This includes optimizing workstations, reducing underutilized areas, and enhancing collaborative spaces to boost productivity. Effective space planning can result in significant savings by minimizing the square footage needed while maintaining or even improving functionality.

3. Create a Competitive Bidding Environment

Tenants often fail to create aggressive competition from various buildings in the marketplace, especially in renewals. Landlords know that tenants renew 70% of the time, so landlords are reluctant to give renewing tenants market terms. In a renewal negotiation, tenants must convince their landlord that they can and will relocate, even if renewal is the primary objective. Landlords recognize that tenants with proper representation will be thoroughly evaluating the marketplace. By obtaining bids from multiple landlords, tenants can leverage these offers to negotiate better terms, including reduced rent, increased concessions, or improved lease terms from their current or prospective landlords.

4. Pay Careful Attention to Construction Costs and Build-Out Allowances

Ignoring construction costs before signing a lease is where many tenants leave money on the table. All things being equal, tenants should favor sites, spaces, and floor plans with lower build-out costs. When the build-out cost is substantial, tenants should insist on managing the construction and should solicit competitive bids to manage the costs. This involves obtaining multiple quotes for construction work, ensuring that build-out allowances from the landlord cover the actual costs, and managing the construction process to avoid overruns. Effective management of construction costs can lead to significant savings and a more favorable financial position.

5. Pay Careful Attention to Operating Expense Escalation Provisions

A poorly negotiated operating expense and “pass-through” provisions in the lease can cost the tenant serious money over the term of the lease. Specific definitions of building operating expenses, including exclusions, audit rights, and, if attainable, a cap on controllable operating expenses, should be negotiated. Tenants should scrutinize these clauses to ensure they are not overpaying for building maintenance, utilities, and other operational costs. Regularly auditing and challenging excessive charges can also help in maintaining a favorable cost structure throughout the lease term.

6. Compare Lease Options on an “Apples to Apples” Basis

What appears on the surface to be the best economic option is not always the case after a detailed evaluation of the incentives and costs. Have a qualified professional perform a financial analysis so that you have a clear picture of the alternatives. This involves comparing the total occupancy costs, including rent, build-out costs, operating expenses, and any additional costs such as parking or shared amenities. An accurate comparison ensures that tenants make informed decisions that align with their financial and operational goals.

7. Retain Qualified Representation and Utilize Your Own Third-Party Consultants, Not the Landlord’s

The landlord’s agent has fiduciary responsibilities to the landlord. The landlord’s architect and contractor may not be the most competitive in the market. To get the best deal, a tenant must assemble his own real estate team. Tenants considering a relocation or renewal of their office space lease should retain a commercial real estate broker who specializes in tenant representation for office users in their market. Additionally, hiring independent architects, contractors, and consultants ensures that the tenant’s interests are prioritized, leading to more favorable terms and conditions.

For more on the benefits of tenant representation if you're planning an office relocation, click here.