With the continued tightening credit market, the widespread implications of the sub-prime mortgage crisis, high unemployment, increasing energy prices, and modest economic growth (the past six months have been the slowest six month period in the past seven years for the United States), companies must carefully consider how they negotiate their leases. CEOs and those responsible for their companies' real estate decisions need to focus on the big picture and the long-term implications of their next new lease or renewal.
Due to the synergies between markets, it is important to look at the Greater Boston suburban markets when evaluating the local NH market, particularly when looking for trends in the office market. Although NH is known for outpacing the other New England states in economic growth, it remains inextricably tied to the Greater Boston economy. During the last two quarters, suburban Boston rental rates and tenant activity have flattened. Larger tenants have become more cautious before committing to space and smaller users continue to seek more cost effective options. This has caused landlords to consider more aggressive negotiated rental rates and concessions for good quality tenants for both new leases and existing lease renewals.
The NH office market witnessed similar conditions throughout 2007. However, through the first quarter of 2008, NH was a tale of a few cities. Nashua continues to wrestle with shedding its vacancies, although a few leases in play during the second quarter of 2008 will help shrink this submarket's vacancy rate. Manchester and Bedford are in a pitched battle, with Bedford appearing to be the victor, at least in this round. Manchester's vacancy rate has increased from just below 9 percent to its current rate of 16.4 percent during the past 15 months. Bedford has seen its vacancy rate drop from more than 21 percent to just above 14 percent during the same period. Portsmouth continues to march to its own beat with a healthy vacancy rate of just under 5 percent. Concord has maintained a vacancy rate in the 12.5 percent to 13.3 percent range during the past 18 months. Salem added new Class A office space during 2007 and currently has a vacancy rate at about 16 percent. It is clear that in certain NH submarkets, landlords will need to offer additional concessions-both in rental rates and in business terms.
The First Step
So, if it is 18 months before your lease expires, what do you do?
The first thing that comes to a tenant's mind is, I need to know what market rental rates are for similar space to mine. This is an important piece of the puzzle, but by no means the only piece on which to focus. The rental rate is among a myriad of lease terms and conditions that form the relationship between the tenant and the landlord, as well as create the total cost of occupancy for the lease obligation. Understanding the importance of those other terms will help to create a lease that makes the most of the current economic conditions and can often provide the tenant and landlord with an agreement that can offer benefits to both.
Start Early
Leasing activity is typically driven by lease expirations. However, there are potential benefits to both the tenant and the landlord who agree to begin discussions about an early renewal. In today's market, tenants can often restructure their lease months before the lease expires and receive concessions from the landlord in exchange for an early renewal commitment. Landlords will often agree to have such discussions as they benefit from renewing a tenant early-effectively locking in that tenant, which helps to stabilize their rental stream.
Starting early does not only mean renewal, though. There may be opportunities in the market where, given a tenant's credit quality, another landlord may well offer to wrap some of the tenant's remaining lease obligation into the new building's lease structure.
Does Term Matter?
Yes. Tenants who are willing to commit to longer than the typical three- to five-year lease term will find landlords will likely provide additional incentives. These incentives include: money to assist in the cost of a relocation, improvements to the new premises, as well as potential rental credits. Again, the longer the term, the more stable the rental stream, which is especially important to landlords' lenders.
What About a Renewal?
Renewal rights in a lease are always a benefit to the tenant and viewed as a liability to the landlord. They allow the tenant to effect some level of future control over their premises, which is why landlords do not like them. Although a renewal right could certainly pay dividends for the tenant, an appropriately crafted option to renew may be the important lease term that the landlord provides that seals the deal, allowing the tenant to sign a lease.
For example, a tenant who signed a lease seven years ago in Nashua at the then-market rental rate of $28 per square foot had an option to renew its lease at today's market rate, saving approximately $9 per square foot. This renewal right had to be negotiated in the past, in order to potentially benefit the tenant seven years later, which certainly shows that this right was no less important to negotiate than the base rent that the tenant was paying day one.
Can I Transfer my Rights to my Space?
The right to assign and sublet is often overlooked, but is an important consideration to negotiate upfront. Companies can change rapidly, both for the better and the worse. A company may grow quickly and need more space. However, a company may also run into problems and need to downsize quickly. Negotiating this right at the outset could provide your company with a much needed relief valve. Again, although this term is not a negotiated monetary business term initially, it can certainly become one in the future and having assignment and subletting rights in the lease can prove to be invaluable.
What is my Notice?
It is critical to establish clear definitions, timeframes and boundaries for notice periods for renewal and/or expansion options, late payments, default, and change of ownership, among other considerations. Missing a notice by just one day could result in additional costs that were not anticipated, such as rent increases and moving costs.
There are numerous terms and conditions that need to be taken into consideration while reviewing alternative space options in the market. Although there is no guarantee that every tenant will achieve all of these items, today, the NH office market offers attractive opportunities to those who can take a long term view and have flexibility on location.
Importantly, the lease negotiation process does not have to result in a situation where one side wins, while the other loses. Rarely does this result in a successful lease transaction and long-term business relationship. There are numerous opportunities to create a winning negotiated lease document between the tenant and the landlord.
These discussions are best guided by a seasoned commercial real estate broker with experience in handling these matters in the local market. This professional can provide the information and employ resources to ensure that a company's strategic real estate plan is aligned with its corporate business plan. n
Denis C.J. Dancoes II is a director of Cushman & Wakefield in Manchester, a global commercial real estate services firm. For more information, call 603-628-2800, or visit www.cushwake.com.
Business NH Magazine 2008
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