NOW IS THE TIME FOR SMALL BUSINESSES TO RENEGOTIATE LEASE TERMS

In San Francisco these days, its hard not to notice the emptiness of the commercial real estate market. The San Francisco Chronicle recently reported that San Francisco commercial real estate vacancies reached 33.% in September 2023, representing ~30 mission square feet of vacant space. 

While San Francisco and other expensive coastal cities are experiencing a slower return office rate, this trend is not conscribed to coastal cities and is also present in midland states like Ohio, Arizona, Tennessee, Kentucky and Minnesota. Kastle reports office building swipes are still ~40% of what they used to be in the cities like Chicago, Philadelphia, Detroit, and Dallas. As it’s been stated repeatedly in the press, the pandemic changed how people live and work, most notably proving their ability to work remotely via virtual meetings and digital communication. This means that office buildings will never be filled up like they used to, and the resulting weak demand will ripple through the entire commercial real estate market by putting downward pressure on demand. This creates a great opportunity for small business owners to negotiate rental lease agreements. 

Renegotiating rental lease terms can be tricky because small businesses generally invest a significant amount of capital to build out a commercial space with trade fixtures and make it functional for their business needs. For commercial kitchens and food service businesses, there could be less flexibility as kitchen trade fixtures and some equipment are ‘built-into’ the space and cannot be relocated. 

But, given that most commercial leases are for 10 years or longer, the monthly lease rate savings compared to the opportunity cost of moving expenses or re-investing in equipment could pay off. It might also simply be smart to relocate your business to an area with higher foot traffic as people’s movement patterns have shifted along with commute patterns, meaning the business in front of the train stop in front of the office building that sees only ~60% of the foot traffic as pre-pandemic, could do better near the school or sports fields where potential customers frequent. 

Even if moving costs are as high as $20,000, a $500 monthly savings on rent over a 5 year lease amounts to ($30,000 = $500 x 60 months), resulting in a $10,000 savings. 

So, dig deep and find the courage to negotiate your lease. But don’t go into the negotiation unprepared. Do your research on (1) local competitive rental rates, (2) read your actual lease and ensure you understand the terms and options, (3) prepare multiple new monthly rent proposals and ensure you know your BATNA - Best Alternative To Negotiated Agreement. 

Want a thought partner for preparing for the conversation - reach out today!