Conversion. This is not something that is done often, but depending on the situation, converting a site can generate interesting savings. Remember, most real estate sites are only there to protect & host your operations. If you have a warehouse which you own and that happens to have some offices and other free space and at the same time you have an office lease which is located at a reasonable distance and that lease is coming to an end, you might want to see if you can convince your colleagues working in the office if they would accept to move into the warehouse site. Depending on their requirements, you might be surprised by their answer.
Click here to read Part I.
Today many people work remote (at home or on the road) and the need for flashy expensive offices is not a priority. In addition, people are increasingly becoming aware of the costs, and will generally try to reduce costs for the company. Some might not without being very vocal about how they did an effort, but looking good is still par for the course. So, if you have low cost sites that are well located or located at acceptable distance from other more expensive sites, look to see if you can relocate from people to the low cost site. Even if you need to put a few dollars into making the low cost site more acceptable to the people, sometimes it makes good financial sense.
Sharing. The sharing of a site is not an event that happens often. It seems that companies and organizations prefer to control their own sites and sharing sites so split costs is not very popular. However, in some cases it can lead to interesting savings. There is a wide range of sharing and partial subleasing possibilities because each site is different. You might have an office site that has a section that you no longer use and would accept to share or sublease without physical dividing the site or by doing very minimum work to divide it. For example, you could lease the empty section, give your tenant access to your lobby and the usage of the receptionist, and give access to washrooms and a coffee area.
Depending on the layout of the office, it might be possible to divide the site by simply restricting access to a section of the office. As a real life example, we once had an office in a large city, which we did not fully use. The lobby was in the front with the washrooms and a small coffee area. It gave access to two sections of the office so it was easy to simply give our tenant access to one section of the office and allow the tenant to use the lobby, washrooms and coffee area. The rent they paid actually paid for almost all the office (including the section we were using), it was a great deal for us and one which the tenant was satisfied because our site allowed them to be located exactly where they wanted to avoid paying for a receptionist full time.
Relocating. This option can sometimes bring good savings but a good financial analysis always needs to be done prior to moving because if not, you might end up with extra costs that ruin all your savings or worse, increase your costs. How can you save money by relocating? Well, there are many potential sources of savings here. First, you might be able to find a site with a lease rate substantially lower than what you presently have. It may be because the site is of a lower quality than your existing site (ex: going from a class A to a class B building) or that the landlord of the site you are contemplating has a low occupation. This can happen when landlords take older buildings, renovate them, (or convert them) and start to lease the building.
The first tenants to lease this site often have the chance to negotiate with more “flexible” landlords than after the building is almost fully leased. If you can find a newly renovated building, preferable one that was renovated by a landlord with a good reputation, you might find that hidden gem in the market. Depending on your needs and the term you are searching for, you might be able to find a space that is a sublease.
As we know, tenants, which put their sites on the market for subleasing, have one idea in mind to recuperate as much as possible on their lease. But in most cases, they are also willing to accept a lower rate in order to lease it quickly (no real estate lease manager likes to keep empty sites for long time, especially for companies for which real estate is not their business but only something to host their operations, as like most companies).
I found that the subleases that have less than 5 years remaining offer the best discounts and the discounts only seem to increase, as the lease gets closer to the end. This only makes sense, after all, if there is only say, two years left on a lease, most companies know that if they want to move to the site for the next five years, they will have to negotiate a sublease for the first two years and also negotiate a head lease with the landlord for the following three years. And if the landlord is not willing to start negotiating for a lease which will only start in two years from now (after all, the landlord has time to potentially get better rates), do you really want to risk only signing for two years now without knowing what the landlord will want afterwards?
For this reason, subleases, which only have one or two years remaining, are often negotiated at a deep discount. If you can negotiate with the landlord for a head lease after the sublease term then you might be lucky to get a great deal on the sublease. In addition, depending on your operations, if you can afford (from a disruptive point of view) to move sites each one or two years, going from sublease to sublease might be for you. In any event, you will need to do a complete financial analysis to measure the pros and cons of relocating. Please be sure to include all costs (lease, physical relocation, tenant fit-up work required… etc.) before taking the decision.
Cost reduction. The reduction of lease costs can come from a number of places. I will only list a few here.
Revenue generation. When leasing a site, revenue generation is not something that comes up first. Second, or actually almost ever. However, leasing a site for your operations should not always prevent you from finding way to generate some money. There are a few sources of revenue that you can look at assuming that you inserted the proper wording in your lease during the negotiation phase. Here are a few of these ideas. Remember, your lease needs to allow you to do this and you will probably need to get approval from the landlord and the city first.
- Reducing your energy costs. This is often not the main responsibility of the person in charge of managing the leases, but getting to know what your company is paying in terms of energy can help you initiate some discussions with colleagues about what is done to reduce energy costs. If your company owns the sites or your lease states that you are responsible for the energy, then this falls on your company to address this. If your site is leased and the energy is included in the lease, then you can talk to the landlord to see what measures he/she is doing in the building to reduce the energy consumption for the tenants.
- Minimize the size of the space you take. If most of your standard offices in your company have a ratio of say 200 square feet per employee when the national average is about 170, the next office you lease, you might want to bring down your ratio to a more modest one. You can start to benchmark your sites and see which sites seem to have a better (lower) ratio of employee per square feet (or square meter), if you find that on average you are using 160 square feet per employee and you have one site at over 200, you might want see how you can reduce this.
- Allow for remote working. This idea is probably not the responsibility of the real estate lease manager, but if you have a company policy that encourages remote working, you might be able to bring awareness to people in your company that if employees working remote can share some offices, you might be able to save some occupied space.
- Avoid taking too much space. Although everyone seems to agree with taking/leasing the right amount of space that you really need, I am still amazed at how often people asked me to forecast for growth even at times of economic slowdown. It seems that people are always afraid of missing space, and to prevent this will ask the real estate lease manager to lease more space than they really need. My answer to this has always been to try to convince the people to take only what they needed (accept at times when expansion of operations where already well planned and had a significant chance of happening) and if growth really comes, there will always be possibilities to deal with that. After all, where there is growth there is increased budget (with some luck) and you will probably run out of money before you run out of available sites.
- Signage. If the space that you lease is well located and you do not need signage or not all the signage space that your space provides, then if your lease permits it, you could lease out that extra signage space.
- Parking. If your site came with extra parking and you do not use it, you might be able to sublease some of your unused space. For example, if you lease a warehouse and only have a few employees working from the site, if the site is located close to offices, there might be a potential to lease some parking spots to the tenants in the office spaces net door. In some cases, we leased space a portion of our parking to the company next door to us, for parking their trailer trucks. The revenue might not be huge, but if you are not using a section of the parking, any extra revenue can be welcome.
- Antennas on roof. This one is getting harder to add in the lease and if you lease a space in an office, changes are you can forget about it. However, there are still some sites where the landlord will accept if you install an antenna of some kind to generate revenues. Telephone companies sometimes seek sites for this, although it is getting rarer by the day.
- Tax contestation. This is obviously easier to do if you own the building than if you lease it, but asking the city to re-evaluate the building might bring some savings on your municipal tax bill. Whenever you think that your municipal taxes are increasing more than you think are they should (many people would rightfully argue that this happens each year), you might have a chance to contest this.
Also, if your building has something that has changed (you demolished a section, you no longer use the building, the aging condition of the building makes that its market value is way below what the city thinks its worth…etc.), then going back to the city to contest your taxes can sometimes lead to positive results. If you do not have the time or the expertise to do this, there are numerous firms, which will do this for a percentage of the savings they find, so this reduces your risk because if they cannot reduce your tax bill, you pay them nothing.