How Tenants Can Save, Add Value to Bottom Line

SAN JOSE, CA-As office rents in the Bay Area and Silicon Valley increase, cost-conscious tenants are looking for other ways to save money. And in viewing their total occupancy costs, more CEOs, CFOs, and real estate executives are starting to question their approach and scrutinize all negotiable lease terms in an effort to add value to the bottom line. So says Robin Weckesser, a managing principal at Cresa in San Jose, who is in charge of heading up the Bay Area Project Management group. Weckesser recently chatted with GlobeSt.com on the subject.

According to Weckesser, many tenants are avoiding extra costs by consulting a project management early on in the game, to even assist in site section. “With declining vacancy in all markets of the Bay Area and the need to update second-generation buildings, this need is even more critical,” Weckesser says.

He gives an example where a tenant signs what appears to be a “perfect”45,000-square-foot lease in a location with workforce recruitment, high visibility etc., and the transaction includes a competitive rental rate  or $5 per square foot annually below current market rates over a seven-year term plus three months of free rent.  At first glance, he says, it seems good. But what about not meeting the scheduled occupancy date due to unanticipated delays with permitting and furniture; a delay of three months results in loss of the negotiated free rent and a costly holdover penalty on the current lease?, he says. Or what is the tenant later realizes they need 5,000 less square feet or “if you engaged an architect who, after completing a code analysis, tells you that because of new occupancy requirements, you can’t accommodate as many employees as you thought, and you now need additional space?”

There are many problems that cannot be anticipated, Weckesser points out, which is where the importance of due diligence among other factors comes into play.

Weckesser points to the importance of space needs assessment to ensure that the space needs are accurate. Questions like “are you sure you need 30,000 square feet, or could you reconfigure your space more efficiently to utilize only 28,000 square feet or 25,000 square feet?” are important to ask. “What about the potential for expansion or contraction over the course of your lease?”

Other things to keep in mind, according to Weckesser, are virtual office considerations; tenant improvements; base building conditions; and a realistic occupancy date. Weckesser adds that while the integration of a project manager can help avoid some issues, “in no way does it negate the importance of an experienced corporate real estate advisor to represent the tenant.” Instead, he says, it can only help to “add value, ensuring greater efficiency, continuity, and accountability.” 

No matter what the economic climate, you should negotiate the best transaction terms possible, he says, while, at the same time, “look beyond traditional lease terms and building conditions.” In doing the above, according to Weckesser, the tenant can squeeze “less obvious but potentially greater savings out of their lease.”