Renew or relocate
With space abundant and perks tempting,
small firms have big options
by Liz Wolf
With its lease expiring in September, the 52-employee Greater Minneapolis Convention & Visitors Association (GMCVA) wanted to see for itself what all the hoopla was about. They’d heard of tempting offers like free rent and discounts on parking.
“Our landlord was not that aggressive in getting us to stay,” says Greg Ortale, GMCVA’s president and CEO. “We started looking at options to put pressure on the landlord, if nothing else.” The company currently offices at Multifoods Tower in downtown Minneapolis.
What Ortale found was some very attractive offers. The organization weighed its options and signed a 10-year lease for 20,000 square feet at Marquette Plaza.
“The economics are such that — what can I say? They’re damn good,” says Russ Nelson, president and principal of Minneapolis-based Nelson, Tietz & Hoye, the tenant rep firm that the GMCVA used. “They achieved significant rental savings and will get fabulous, efficient space.”
“We have responsibility for marketing Minneapolis, and we bring a lot of people into our office,” Ortale says. “We want space that when you come off the elevator you get a ‘Wow!’ We’re able to relocate to space in a fiscally responsible manner and still present a bang.”
Whether a company wants to present a bang in classier office space, take a more prime location, expand for future growth or simply save on rent, now’s the time.
“There’s no question about it. If you’re shopping for space — whether you’re big or small, short or tall — space is cheap,” Nelson says. “Your timing right now is fabulous.”
Right size
LaBreche Murray Public Relations, which has a lease expiring in December, also is looking at its options. The firm has 7,000 square feet at Riverplace in Minneapolis, which is more than it needs. At its peak, it had 22 employees and is down to 15, says principal Jerry Murray. Deciding on the right amount of space is critical.
“We’re confident we’re going to grow and return to the size we were and probably be even larger as the economy gets healthy again,” Murray says. If the firm stays at Riverplace, it’ll retain its 7,000 square feet for future growth. “But if we decide to move, it provides us with the opportunity to be more efficient with less space,” Murray adds. The firm, working with CB Richard Ellis’ Bloomington office, is finding desirable rates.
“The economics are driving our decision,” Murray says. “It’s a rare business opportunity to be able to reduce one of your operating expenses by as much as 50 percent. Many Class A net rates are half the price they were five years ago. What’s even more interesting is Class A space is significantly less than Class B space was five years ago.”
What’s driving these deals? With Twin Cities office vacancy rates at 20 percent, space is in abundance, and landlords are aggressive to attract and keep tenants. The vacancy rate just five years ago was 8.4 percent, reports Bloomington-based United Properties.
The oversupply of space is a result of the shaky economy, corporate downsizing and consolidation. “We could be in a soft landlords’ market for three years or longer,” Nelson says. “It really depends on the economy coming back.”
All kinds of deals are out there for the taking. Most effective net rents have been cut around 25 percent and as much as 50 percent in some buildings. Concessions include free rent, moving allowances, attractive tenant improvement packages and parking discounts and are part of today’s lease negotiations.
“Many landlords are providing whatever it takes to make deals, within reason,” says Jim Jetland, United Properties vice president. “I certainly think if you have any second thoughts about your location, go to the market and you’ll find more alternatives than you could have ever imagined.”
Landlords are being creative, says Steve Chirhart, vice president of Minneapolis-based Griffin Cos. “With the softness of the market, they’re being more flexible with future expansions or contractions, right-to-first-refusals and renewal options. Even some of the language in the lease is on a more open basis versus when it was a landlords’ market.”
And the deals aren’t just for big tenants. “Smaller companies looking for 5,000 to 10,000 square feet are getting out and taking advantage of the market,” says Paige Rickert, senior vice president at CB Richard Ellis. “I joked with a client, who’s a 5,000-square-foot user, that now he’s the 800-pound gorilla. The marketplace is interested in every deal regardless of size.”
Sweet deals
Wildwood Wealth Management took advantage of the market to upgrade and expand. The five-person firm signed a five-year lease at Crown Roller Mill in downtown Minneapolis, relocating from 915 Washington.
“We had 1,400 square feet and paid $2,000 a month,” says Joe Techar, company principal and owner. “Now we have 3,000 square feet and pay $5,000 a month. We’re paying more, but the value is far, far greater. We’ve doubled our space, significantly upgraded and have a better location. We’re happy campers. We got exactly what we wanted.”
Techar says it’s crucial for any company to define what it wants when shopping for space. “Look at your needs and what you’re willing to accept and give up in negotiations. Think about the growth of your company and expansion options. Define your technical requirements. Know what you can afford. Be willing to look at lots of spaces. And start early, because you want leverage.”
After narrowing the search, Techar found himself in a favorable situation: He had three landlords competing for his business. “The more knowledgeable you are and the more options you have, the better position you’ll be in,” he says.
His final decision came down to the location, rate and tenant improvement package. The landlord reconfigured the space, painted it and constructed a kitchen area. It also picked up the tab for the move.
Techar advises companies to work with a commercial real estate broker. “When you’re a small business, you don’t have the time or knowledge to look for space. Negotiating is a complicated process, and the learning curve is steep. You only do this once every five or 10 years, why invest the time when you can hire a professional?”
Techar worked with Minneapolis-based Braman & Associates and says, “They clearly paid for themselves.”
The soft market is also allowing other companies to negotiate favorable deals. The 46-employee Minneapolis Foundation signed a lease for 20,000 square feet at IDS Center, leaving Foshay Tower after 30 years. The nonprofit found its former space was no longer functional and worked with Nelson, Tietz & Hoye to find a high-profile location.
“Now they have fabulous, functional space, and IDS is the most well-known building downtown,” Nelson says. “It was a great deal and great timing. They’re spending less than they were at Foshay.”
Though not disclosing specifics, Emmett Carson, foundation president and CEO, says they negotiated a very competitive rate at IDS. “We’re extraordinarily pleased with the economics of the deal and what IDS provided to meet our needs,” he says.
The landlord was creative in offering incentives, including a permanent kiosk in IDS’ Crystal Court for the length of the lease, signage opportunities and community space for events. “That was icing on the cake,” Nelson says.
Staying put
While some tenants are taking advantage of the market by moving, oftentimes tenants decide to stay put. Landlords are approaching tenants early with tempting renewal options.
“Typically in the past, a landlord turns up the heat 12 months out and makes a deal six months out,” Jetland says. “But in this market, they’re starting the dialogue as early as two years out.”
About 80 percent of Nelson’s clients are renewing their leases. “That way they can get immediate reductions in rent, and in exchange, the landlord gets a longer term,” Nelson says.
While there are plenty of opportunities available, Jetland says deciding to move isn’t always about getting the best deal. “Not every tenant is looking for the least expensive alternative,” he says. “They’re looking at location, image, strength of the landlord.”
That’s the case for First Premier Capital. Company principals Bill Kelly and Steve Alpeter relocated their seven-person firm from Northland Plaza in Bloomington to the brand-new Grandview Square in Edina, signing a five-year lease for 2,200 square feet.
“We looked at a lot of spaces, and we could have done some pretty inexpensive deals, but we decided to go small, nice and close to our homes,” Kelly says. “I’m so close that if I hit a stoplight, I’m mad.”
That convenience, he says, is worth the higher price. Though they didn’t take advantage of dirt-cheap space, they saved up to 15 percent off the net asking rate. “Without a doubt, we could have found a more aggressive economic transaction for them, but the location and image were important,” says Jetland, their broker.
“We probably didn’t ‘bottom-hit’ the market, but we’re happy with the deal,” Kelly says, adding that they probably wouldn’t have been able to afford this building if there wasn’t such a glut of space.
“Also, if the market wasn’t so soft, we probably wouldn’t have received the immediate attention of architects and buildout people,” he continues. “We did the whole buildout in 60 days.”
Another alternative is sublease space — space that companies have remaining on their leases, but are not occupying and want to get off their books. In downtown Minneapolis, Nelson says there’s around 1.5 million square feet of sublease space. “That’s the largest amount we’ve ever seen,” he says. “The advantage is you get even lower straight economic deals and sometimes furniture is thrown in. But you often have to deal with shorter terms and limited tenant improvement allowances.”
Jetland agrees there may be inconveniences and risks. “When you take over a sublease, if the original tenant goes bankrupt, you could be evicted from the space,” he warns. “Be sensitive to the creditworthiness of your sub-landlord.” However, if a company is willing to be flexible and take on additional risks of a sublease, it could receive a discount of up to 75 percent.
No matter what type of space a company wants, there are options galore. Most agree the deals won’t get better.
“We’re finding the economics to be just as attractive as advertised,” says Murray of LaBreche Murray.
