Are Short-Term Extensions the Answer?

As the new year unfolds, these questions and others similar to it are among the immediate drivers affecting business owners, CFOs, law firm managing partners and others responsible for making commercial real estate decisions. The task is not limited to any particular industry class or real estate type, be it office, industrial or retail. Every responsible space user is faced with the same challenge.

The broader questions come down to those factors specific to the individual business: "How can I align my business and operational strategy to my real estate requirements?" That question, if prudently considered, will govern the next steps in making decisions more manageable.

In an economic climate where uncertainty displaces years of robust increases in revenues, profits and employment, present conditions now put many business owners in a state of confusion and malaise. Moving forward, the cautious consideration may be defensive, but now is also time to take advantage of economic opportunities. They do exist and if the offensive benefits outweigh all other factors important to your business, do not discount the latter.

A discussion at a recent law firm managing partner event revolved around salient and fundamental points decision makers should be addressing: look at your client/customer base and discontinue that business which is not profitable; stay on top of accounts receivable, making adjustments as necessary.

Business owners should meet with clients/customers and understand what issues are impacting their businesses. Nothing should be taken for granted. If well capitalized, take advantage of the increased pool of high-caliber personnel and any other economic opportunity that may enhance your organization.

The initial question, about what to do on the next office lease, has a variety of answers--do nothing, renew short term, give up space, sublease space, or move into less expensive space. Most decisions lead to the initial responses, as evidenced by the increases in short-term lease extensions currently being reported.

Invariably, many businesses renew short term because of several factors out of their control. Yet a firm or business can take advantage of a number of opportunities that will provide immediate reductions in rental costs and favorable options that did not exist six months ago, such as reduced rental rates, 12 months free rent, substantial tenant improvement allowances and multiple options to reduce, expand, terminate or renew leases in the future.

Taking advantage of these economically attractive structures requires diligence and analysis. These are unprecedented times and as such require a more comprehensive evaluation of your business strategy. If faced with a real estate decision in the near future, the short-term extension may in fact yield safety.

On the other hand, meaningful long-term savings in occupancy expenses can be measured and achieved. Consider your alternatives objectively. They may answer the question for you.

The views expressed here are those of the author and not of Incisive Media or its publications.

Tom Capocefalo is managing director of Studley Inc. in Miami. He can be reached at tcapocefalo@studley.com.