The Top 10 Mistakes Companies Make When Leasing Office Space

As office tenant advisors, we often find companies making the same mistakes while going through the office space leasing process. We have come across a website, Openofficespace.com, that outlines the Top 10 Mistakes. All of these mistakes can, and should be, avoided and are detailed in the subsequent pages.

1. Neglecting to determine current and long term priorities
2. Choosing the wrong broker, or not using one at all
3. Not giving you enough time to fully go through the process
4. Making your decision based solely on price
5. Not understanding all of the cost associated with your office space
6. Choosing the wrong location
7. Not properly estimating the amount of office space needed by your company
8. Signing too short or too long of a lease
9. Underestimating the preexisting condition of the premises or office suite
10. Not asking for enough Landlord incentives

Mistake 1- Neglecting to Determine Current and Long Term Priorities

Neglecting to determine current and long-term priorities is the most significant mistake a
company can make when looking for office space. Sit down, take a breath, and write out what
is going to be important to you and your company when it comes to your office space. The
below points can act as your checklist when determining what is important for your office
space.

Corporate Image – What image is important to convey to my customers, my prospects,
and my employees?

Layout of the Space – What type of environment does my business call for in the office?
An open environment that creates collaboration amongst my employees, or a more
traditional environment where certain employees have their own private offices for privacy
or a combination of both.

Budget – What can I afford? Does my budget match up with my corporate image?

Growth – What’s the future growth of my company? Does my current office building/Landlord give me additional options to grow my business with limited interruptions?

Technology – Is there a certain technology that my business needs that is only available in certain locations? (i.e. Data Center, Electrical Capacity of a building, or Backup Power)

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Mistake Number 2 – Choosing the Wrong Broker, or Not Using One at All

Choosing the wrong office broker, or not using one at all, can be a costly error for any
company and one that happens on a regular basis. An office space search or office
renewal can take anywhere between 60 days to 2 years depending on several different factors.
Either way, it is a significant amount of time to be dealing with someone. Make sure that you
and your broker get along because it can be a miserable experience if you don’t. A company’s
office space lease is usually a company’s 2nd or 3rd largest expense. The right broker
will be able to reduce a big expense in your company’s bottom-line, and should further be able
to protect your company’s interest on non-economic terms as well. Finally, make sure your
broker knows the submarket that you are most interested in. We would say that a good broker
should be able to predict the final rental rate of your office space by at least $1.00/Rentable
Square Foot.

90% of all office space leases signed in Philadelphia are done so with a broker involved on
both the landlord and tenant side of the negotiations. However, we still run into companies
that insist on looking for office space and negotiating their office space renewals on their own. Their
main reason for not hiring a broker is because the decision maker thinks they will save
money by not having a broker’s commission factored into the deal. This reasoning is valid
because there is technically a 2% savings on the expenses a Landlord will have to pay for that
broker’s commission. A good broker will generally produce on average a 10% – 15%
improvement on the deal terms they have received from the Landlord. Finally, a company
usually only deals with their lease every 3 – 5 years, while a broker deals with it everyday.
Who do you think is more qualified? At the end of the day, by hiring the right office broker
you will save time and money on your next office search or office renewal.

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Mistake Number 3 – Not Giving Yourself Enough Time to Fully Go Through the Process

Over and over again, we run into clients that have not given themselves enough time to fully
go through the office leasing process. What do we mean by that? They haven’t given
themselves enough time to explore the office market, in order to find comparable
alternatives, and use those alternatives as leverage against their current Landlord. Office
Brokerage firms will argue about when a company should start exploring the office market.
Some say 2 years before your lease expires, others a year, and still others may say 3 months
before your lease expires. The real answer is that it depends on the company size, internal
goals, and future growth needs. We tell my clients that you should allow for 3 – 6 months
preparing for a move. With that in mind, if you first to come to your existing landlord with 3
months left on your lease, that Landlord knows that you don’t have enough time to move
out of your space before you go into the holdover period. Thus, you lose your leverage to
obtain the best deal for your company.

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Mistake Number 4 – Making Your Office Space Decision Based Solely on Price

Making your office space decision based solely on price is one that more and more companies
are making because of the current economic situation. It is important to understand the other
factors that should go into the decision on where to house your business. Price should not be
the only factor that a person bases their office space decision upon. If it is the only factor,
more often the not, it will come back to bite you. Here is a list of other factors, that should
be considered when determining your future office space location:

Location, Location, Location: Not only a real estate adage, but a fact of life. The
location of the office is usually described as the either the biggest benefit or the biggest
negative.

Commute Patterns: Take a preliminary survey of your company’s thoughts on their
current commutes to determine how the new office location might affect their commute
pattern.

Amenities: What restaurants, banks and coffee shops, etc. are available nearby? Being in
an isolated office park can be a very bad situation for the comfort of employees. At times in
cannot be helped, but being in close proximity to the amenities employees use during their
lunch break can be a huge recruiting advantage.

Safety: What is the neighborhood like late in the evening? Would a female employee feel
comfortable walking to their car or public transportation after working late on a project? All
of these issues should be considered when considering your next location.

Layout of the Space: Is the layout of the space desirable. Is there good natural light? Does
the space allow for our business flow between departments?

Image of the Building: The question depends on how you are trying to present yourself
to your clients and potential employees. If you are a law firm that helps with class action
suits, it might not make sense to have the top floor of the nicest building in town. If you are
the high-powered corporate firm, it might be absolutely necessary to display that image. The
location, layout, and feel of your building and space will leave an impression on your visitors
and should be considered in your decision making process.

Parking/Public Transportation: Is there a need for public transportation for employee’s
or clients? The proximity to public transportation and affordable and convenient parking can
be extremely important.

Recruiting: Will your location and building aid or hamper you in your recruiting efforts
for top talent? How will the location affect current employees?

Expansion: Will your location allow for easy expansion? Is there space available nearby
that can work if there is not space within your building?

Building Ownership & Maintenance: Your landlord’s involvement and attitude and
responsiveness towards tenant repairs should be a critical element of your building decision.
Learn about the ownership of the building and their management capabilities.

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Mistake Number 5 – Not Understanding All of the Cost Associated with Your Office Space

Not understanding all of the cost associated with your office space is an easy one for
companies to commit when trying to determine their future office space location. This is
because most tenants become so focused on the rent that they fail to see the other expenses
that go along with their office space. Here is a quick checklist of the basic expenses an office
tenant needs to understand prior to signing a lease:

Operating Expense Pass Throughs – If you are signing a full service lease, find out what
your base year is going to be for the lease. Then look through the building’s historical
operating expenses, and see how much they have gone up over the years. The increase in
expenses, above a tenant’s base year, is going to be passed through to the tenant. This
expense can be a significant one that Tenants don’t realize until later in their lease term.

IT/Communications Expenses – Find out how much it will cost to set up your internet,
phone systems, intranet, etc. Whether you are expanding in your current location or moving
into a new location, this is something that a tenant needs to determine before a decision is
made. Talk to your IT person.

HVAC/Supplemental HVAC Costs – Will you be running your operations after hours? If
so, what is the cost to have the HVAC running during that time? Will your data/server room
need supplemental HVAC? If so, what is the cost? Will the Landlord pay for it? Ask the
question before signing a lease.

Furniture – Will you need different furniture then you have now? If so, should it be new or
used? Or, should you just move your existing furniture? How much is it to break down old
furniture and move to a new location? You might be surprised by the answer, but either way
you need to speak with a furniture vendor to understand the cost of both options.

Moving Cost – If you do move, what will it truly cost you to relocate your business?

Insurance – Do you have the right insurance policy that matches up with the lease
requirements? If not, how much will it cost to increase your policy? You should definitely
have your insurance agent review the lease prior to signing it. These are some of the basic
costs associated with your office space that most tenants do not think about prior to
signing a lease. There are others, but this will get you started.

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Mistake Number 6 – Choosing the Wrong Office Space Location

  • Choosing the wrong office space location is one that happens more than a person would
    think, and happens for several different reasons. Here are a several reasons why
    a company may end up choosing the wrong office space location:
  • The decision maker who made the final decision on the office location is no longer with the
    company, and the location is not convenient for the maturity of employees.
  • The traffic is worst then expected, and a person failed to realize this because the only times
    they toured the office space were during non-peak traffic hours.
  • A person failed to check into the tenant mix of the building, and there are tenants within
    the building that make it an unpleasant experience.
  • An office location is not centrally located for valuable employees, and a company loses
    these employees to other jobs because of a better location.

Remedies:

  • Perform an employee map – Plot out the addresses of all your employees, and try to find a
    central location.
  • Make sure you drive around any prospective building choices during peak traffic hours.
  • Ask for a list of all the tenants within a prospective office building, and review it.

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Mistake Number 7 – Not Properly Estimating the Amount of Office Space Needed

Not properly estimating the amount of office space needed by your company is one of the
more frustrating mistakes a company can make when leasing office space. This mistake
either wastes a company’s money on unused office space, or it can hinder a company from
growing because there is no room to hire new employees. Either way, if significant term is
left on the lease, this could be a problem for any company. How do you avoid the problem?
One way to avoid this problem is to hire an architect to develop a space program for your
company, before you go out and tour the market. Let them know exactly how you’d like
your office space to lay out, what your growth needs might be in the next 3 – 5 years, and
which departments of your company need to be close together within the office space. By having a
professional do this in the beginning, you’ll usually be able to avoid the pitfall of taking
the wrong amount of square footage. Test fit plans can then be prepared by each landlord for
their respective buildings based on the program. The second way to prepare for this pitfall is
to allow for it within the lease. As a tenant, you should make sure that you have favorable
lease language that allows for you to get out of a lease if the landlord cannot accommodate
your growth needs. If your company is downsizing, then you need to make sure that you have
favorable lease language that allows you to sublease your space with the least amount of
interference from the landlord. Some growth or downsizing can be unforeseen, and preparing
for it within your office lease will allow your company to avoid being stuck with too little or
too much office space.

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Mistake Number 8 – Signing Too Short or Too Long of a Lease

We’ve seen these two mistakes all too often. There may be many reasons why a company
may want to sign a short lease term such as:

1) They don’t understand their future growth needs, and don’t want to lock into a long-term
lease that hampers their growth.

2) It is a down economy and the owners don’t want the liability of a long-term lease in case
their business does not make it through the economic downturn.

3) The company’s main goal is to be purchased by another company and a long
term lease could hamper those efforts. These reasons are very valid reasons to sign a
short-term lease. However, it might be a mistake because of the given office market the
company is in while signing the lease. For example, right now we are seeing one of the
best office markets for tenants. Landlords are doing everything in their power to either keep
an existing tenant or entice a new tenant to move to their building. If you sign a short-term
lease, you are playing right into the hands of the landlord. Sure, you’ll get a great deal, but
when that lease ends in 2 – 3 years, the market will have recovered. By the time that
company renews, the rental rate will be much higher than what the company was previously
paying. Why not take advantage of the market? A company could lock into a great rental
rate for 5 – 10 years, and allow for certain provisions in the lease to get out early if needed.
Landlords are more willing to have termination clauses in their lease because of the down
office market.

During the good times companies may find themselves signing too long of a lease term.
Why? Because they are just thinking about getting a lease signed and moving on to their core
business. Generally, most tenants don’t stop to think about growth needs and how to
accommodate them. Also, a company doesn’t think about how to protect themselves against
the lease if they begin to struggle. During good times, landlords are able to push for longer 5 –
10 year lease terms to be signed by tenants. These leases have very few, if any, termination
clauses for a tenant to get out of a lease, and a tenant is usually paying the highest rental
rates. Often times, when a company signs a long term lease in the height of the market, that
company is stuck in that lease when the market turns into a tenant’s market.

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Mistake 9 – Underestimating the Preexisting Condition of the Office Space

Underestimating the preexisting condition of the office space is an easy one for a
company to make when searching for office space. Most Tenants, understandably, don’t
know the cost associated with their office space build-out. Why would they? Companies
usually only deal with their office space every 3 to 5 years, and move into new office space
even less. Here is a list of items that most Tenants fail to connect to their potential office
space build-out:

Data & Cabling – Is the potential office space currently wired? If so, can it be reused? If it
can’t be reused, who pays to have the wiring removed? If the space isn’t wired, how much will
it cost to wire it?

Power – Is there enough power coming into the office space to run my business? If you are
planning to put cubes into the office space, is there existing power available to plug the cubes
in?

HVAC – Does the office space have a data/server room? If so, does it have a separate
HVAC unit to cool the room? If not, does it need one? If the room does need a separate
HVAC unit, who pays for it?

ADA Codes – Is the office space up-to-date on all of the ADA codes? If not, will it need to
be updated? If so, who pays for it?

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Mistake 10 – Not Asking for Enough Landlord Incentives

Not Asking for Enough Landlord Incentives is one that companies not using an office broker
to help with their office space search, often make when signing a lease. This is because most
tenants don’t do this on a regular basis and won’t know about all of the incentives that a
potential new landlord can, and often does, offer to entice an office tenant to move into
their building. Furthermore, a landlord may offer incentives to tenants not using an
office broker, but these incentives generally do not match what market incentives are for a
comparable office building. Here is a list of potential landlord incentives:

Free Rent – This will vary depending on the length of term, how much tenant
improvements are going into the space, a tenant’s financial stability, and a host of other
factors. The important thing is to be aware that free rent is out there.

Tenant Improvement Allowance – How much money a landlord will invest into an office
suite depends on a host of different factors, much like the ones in free rent. An important
question to ask when evaluating a new office location: Will the TI allowance cover the cost
to make my new office suite just the way my company needs it to be?

Moving Allowance – Some, not all, landlords will offer a moving allowance to help with
the cost of a physical move. Remember, it generally cost a company $4.00-$6.00/Square
Foot to move an office. A company might be able to get a landlord to chip in on that
expense.

Leftover Tenant Improvement Allowance – Again, some, but not all, landlords may
allow you to use unused TI dollars towards other cost associated with your office space. So ask
the question. If you have chosen the right office broker, then they’ll know what the market
norm is for the above incentives.

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