As commercial market sizzles, landlords score big returns
By Andrea Davis
The commercial real estate industry is in one of the hottest markets we have seen in years with the state average GDP growth of 3.4% in 2018 and a 3.2% increase forecasted for the rest of 2019. In Scottsdale, vacancy rates for industrial and office spaces are dropping as employment gains drive up the demand.
Healthy vacancies in office for landlord and tenant hover around 12% to 14% which, according to Costar, is where Scottsdale is. Additional analytics from Costar forecasts all office submarkets in Scottsdale are positioned to dip below the 12% vacancy rate. This means demand for office will be high and tenants can anticipate rental increases because there isn’t a lot of office product to choose from.
Yet amid the huge growth, industry experts issue pleas of caution. As companies eye their balance sheets for room for more overhead costs — or to shed some overhead — it’s more important than ever for businesses to be cautious and work with experts who know how to help—especially in this low vacancy market, where many landlords have the upper hand. With increases in out-of-state office investment purchases, comes landlord savvy negotiations and possible nightmare scenarios. Unfortunately, many companies deal with a variety of horror stories when trying to buy or lease commercial real estate.
One company, Paradise Village Chiropractic Center, Health and Weight Loss Program, renewed his lease on his own. But, as soon as he signed, he was paying twice the going rate for office space in nearby complexes.
“The nightmare began when the landlord was selling the building and I only had a few weeks to make a decision whether to stay or go. I felt pressured to make a decision, so I signed the lease. What ended up happening was I paid $3,200 a month, when I should have paid $1,600. I got wise this time around and hired an expert to renew my lease. Renegotiating leases is just not what I do as a doctor. After the lease was renegotiated, I ended up saving over $22,000, and my business is thriving,” says Dr. Scott Carmachel at Paradise Village Chiropractic Center, Health and Weight Loss Program.
Carmachel is unfortunately not alone when it comes to every day shrewd landlords. The following are tips to consider when it comes to renegotiating a lease:
Find out what the landlord’s objective is with the building.
Your lease determines your future relationship with your landlord. Make sure you understand it and it is written so that you can live with it.
Make a note on your calendar six months in advance of the lease expiration date so there is time to negotiate the current lease and discover what the market has to offer for other options.
Start the lease renewal process as early as possible to allow for research and delays. Most medical businesses, dentists, chiropractors, naturopaths, etc. lose 10 to 20% of their business, if they relocate farther than a mile from their established location.
A web search for commercial space will reveal asking lease rates. This provides the tenant with the going lease rate for their product type such as office, retail or industrial in their area of town.
Everything is negotiable.
Paradise Village Chiropractic Center, Health and Weight Loss Program is not the only one who has experienced a nightmare situation.
Unfortunately, many new business owners can have trouble dealing with a new lease negotiation.
After Maid Right owners, Angela and Ken Clayton, signed a five-year lease, the company didn’t know the building was about to be sold.
Angela says, “The new landlord was desperate for tenants. He let almost anyone lease the property. The space next to me had someone sleeping in the building overnight. The restrooms weren’t cleaned, the repairs didn’t happen and the neighbors made us so nervous that we didn’t want to leave after dark.”
Today is a totally different experience for Maid Right. They worked with a professional commercial real estate agent who identified several properties and was able to find a new space for the business.
Many negotiation mistakes or nightmares can happen along the way. Most businesses make these four classic mistakes:
Not hiring a tenant representative
Not understanding their lease obligations
Not getting a verbal agreement put into writing
Not hiring a commercial real estate attorney
With the strong Scottsdale commercial real estate market, those leasing need to be extra vigilant when working with landlords and negotiating transactions. Working with a broker can help obtain the best rate and terms possible. The best part is that the landlords pay the fee. It really is no cost to the business owner and provides a peace of mind.
Andrea Davis Commercial Real Estate, recently voted one of best businesses in Arizona by Ranking Arizona, focuses on one asset class: commercial real estate. Davis is uniquely diverse in all aspects of commercial real estate working with landlords, tenants, sellers and buyers with office, industrial and/or retail requirements. She is an expert in site selection, property comparison analysis, negotiations and resourceful transactional follow-through from both viewpoints. The company has closed over $220 million worth of transactions, totaling over 1.5 million square feet.