Tuesday, July 28, 2015

What’s the Price to Lease Commercial Real Estate?

What’s the Price to Lease Commercial Real Estate?

What’s the most common question our company is asked?

Every single prospect call we get – we are always asked the same question.

What’s the price to lease a space?

In this blog post, we will explain why this question is a little more complex than it sounds and why we don’t publish our rental rates.

(Side note: A big thank you to Amy Porterfield for this blog idea – it came direct from her podcast on How to Create Content to Attract Your Target Market.)

Following is a typical prospect phone call that we receive:

  • Prospect: I’m looking for around 4,000 square feet of office space.  Could you give me some pricing information?

  • Landlord: Sure, do you have an idea of the layout?

  • Prospect: Large open space for cubicles, reception, 3 restrooms, break room, conference room and a few private offices.  What is the price?

  • Landlord: Great, and what lease term are you seeking?

  • Prospect: That likely depends on the price – what is the price?

  • Landlord: What exactly is your timing:

  • Prospect: Next 6-12 months, maybe sooner if you will just GIVE ME THE PRICE!!!

Why do we ask all these questions before giving a quote to rent a space?

Glad you asked.

Assume that we have 3 vacant spaces for the above scenario, with our prospect needing 4,000 square feet:

  • Space 1: 3,600 square feet, similar layout to what is desired, available in 9 months

  • Space 2: 4,200 square feet, completely different layout, available now

  • Space 3: 5,000 square feet, similar layout to what is desired, been vacant for 12 months

If we had given pricing information solely from the space requirement, we might have quoted on Space 2, which is the wrong layout.   That phone call might have ended quickly.  But if we had known the prospect was looking at a long term lease, we might be able to remodel the space.

Space 3 is 25% larger than what is being requested, but we would be motivated to lease it at a discount given the fact that it has been vacant for so long.

If we had given pricing information solely on our current availability, we would have only quoted on Space 2 or Space 3, not realizing that the prospect could wait until Space 1 becomes available.

With this specific scenario, all 3 spaces could potentially work.  However, there are several factors to consider, including budget/timing constraints, layout, proximity to competitors, current lease expiration (both for tenant and landlord), etc.

Also, the above example is a simplified version of what might actually occur.  Allow us to further complicate this hypothetical:

  • There is currently a tenant in Space 1, and they are unsure of whether they will be renewing the lease.  They have an option to renew for 3 years that can be exercised with 3 months’ notice, and their lease expires in 9 months.  We cannot sign a lease for this space until another 6 months passes, and the space might be unavailable if the option to renew is exercised.

  • Another prospect is looking at Space 3 and will be deciding within the next month whether to pursue this space.  This specific prospect needs at least 4,500 square feet and can only lease Space 3.  This prospect is also interested in signing a 7-10 year lease, so it is worth holding out another month to see what happens.

  • This leaves Space 2 as the only currently available option for our prospect in need of 4,000 square feet.  For a long term lease, we will remodel the space and have time to negotiate the lease and perform the renovations, since the tenant is looking 6-12 months in advance.

We hope this example was not too complicated.  Trust us, what happens in practice is often much more complex.

And the above example only dealt with office space.  We also lease warehouse space, which often varies even more from space to space than office.  Say we have two 5,000 square foot warehouse spaces available.  One has 500 square feet of office, and the other has 2,500 square feet of office.  Do you think these two spaces will have the same rental rate?  Of course not!

Now do you see why we cannot just publish a price without asking some qualifying questions?

Commercial real estate is not a commodity, like the gas you put in your car.  If you are choosing between filling your car up with gas from an Exxon or Shell station, you will likely not notice any difference in how your car runs.

In contrast, no 2 commercial real estate spaces are alike – even if they are in the same building!  In addition to different finishes and layouts, there are external factors, as described above, that can sway tenant and landlord leasing decisions.

Plus, a rental rate for a new business interested in a 1 year lease will differ from the rental rate for a national company signing a 10 year lease with substantial modifications.

We hope this post illustrates why many landlords (including our company) choose to not publish any leasing rates until some qualifying questions are asked.

Please feel free to leave questions and/or comments.  We read all of them.  You can also email us at leasing@seawaybusinesspark.com.  We provide office space for rent and office/warehouse space for rent in Gulfport, Mississippi.  If you need commercial real estate space in our area, please give us a call at (228) 575-7731 or visit our website at www.seawaybusinesspark.com.