Tenants frequently ask whether it is better to sign a short or long term commercial real estate lease. The answer is, it depends!
Most commercial real estate tenants sign long term leases in hot markets when optimism is high, business is booming, and the outlook is rosy, and sign short term leases in down markets when markets are skittish, confidence is low, and business outlook is unclear. Although this seems somewhat logical, it is actually the opposite of what you should be doing. In hot markets, real estate costs are also typically high, and signing a long term lease will lock in higher lease rates longer term. Conversely, by signing only short term leases in down markets, you miss the ability to lock in low lease rates longer term, and risk your lease coming up for renewal in the future in a higher cost market.
So what should you do in today’s marketplace? Prices have been rising across the country for the last several years with no end in site. However, many economists believe economic growth may begin to slow in 2020. For many commercial real estate tenants it may make sense to sign a shorter term lease in today’s market. For tenants who can secure a reasonable rate and other suitable terms, it may still make sense sign a longer term lease if the tenant can negotiate a lease with a termination option. This would allow the tenant to lock in a rate today while balancing the longer term risk should the economy or your requirements change. Securing a 7 or a 10 year lease with termination rights at years 3 and 5 (and 7) would allow you to lock in a rate longer term, while still maintaining flexibility should your space needs change.
Prior to each of these future termination dates, you can re-evaluate your space needs internally and market rates in general and the option would then be either exercised (a much better and cheaper option usually than paying the remaining rent or trying to sublease the space); or, as is usually the case, use the termination option as leverage to renegotiate your lease to fix issues that have arisen during your tenancy.
Your commercial real estate cost is probably your second or third largest expense. Following the simple rule outlined above will help you keep your costs low and maintain your competitive edge moving forward.
Mobiliti CRE is a commercial real estate brokerage that focuses 100% on representing buyers and tenants. We would be happy to review your commercial real estate lease on a confidential basis and discuss your options with you. We can be reached at (813) 300-2227 or feel free to email us at firstname.lastname@example.org.