Tenants frequently ask whether it is better to sign a short or long term lease. The answer is, it depends!
Long or Short?
Most tenants sign long term leases in hot markets when optimism is high, business is booming, and the outlook is rosy, and sign short term leases in down markets when markets are skittish, confidence is low, and business outlook is unclear. Although this seems somewhat logical, it is actually the opposite of what you should be doing. In hot markets, real estate costs are also typically high, and signing a long term lease will lock in higher lease rates longer term. Conversely, by signing only short term leases in down markets, you miss the ability to lock in low lease rates longer term, and risk your lease coming up for renewal in the future in a higher cost market.
What Should YOU do?
So what should you do in today’s marketplace? Prices are rising and vacancies are declining but the Tampa Bay market has still not fully recovered from the Great Recession. My recommendation is to sign longer term leases with termination options. Why? Well, this allows you to capitalize on the low occupancy cost opportunities still available today while balancing this longer term risk should your requirements change. Securing a 7 or a 10 year lease with termination rights at years 3 and 5 (and 7) would allow you to secure low lease rates longer term, while still maintaining flexibility should your space needs change.
Prior to each of these future termination dates, you can re-evaluate your space needs internally and the option would then be either exercised (a much better and cheaper option usually than paying the remaining rent or trying to sublease the space); or, as is usually the case, use the termination option as leverage to renegotiate your lease to fix issues that have arisen during your tenancy.
Big Piece of Expense Pie
Your real estate cost is probably your second or third largest expense. Following the simple rule outlined above will help you keep your costs low and maintain your competitive edge moving forward.
This post is an update of a post from January 2015 -> The original is here.