Space Race

The weak real estate market offers CFOs a great opportunity. Here's how to maximize it.

Many companies will move or expand into new facilities in 2011, particularly if the economy picks up steam. Fortunately for them — and for companies that simply want a better deal on their current space — the weak commercial real estate market presents opportunities for significant savings. With vacancies still at near-historic levels, landlords are offering 20% to 30% reductions on longer-term leases.

But cheap leases aren’t the only way to save money on real estate these days. Some companies are auditing their current leases and finding that they are paying more than they should. Others are winning site improvements from landlords anxious to keep them as tenants. And still others are employing creative ways to reduce power, water, heat, and other utility costs, pushing annual expenses down by tens of thousands of dollars.

There is also the obvious attraction of buying instead of owning, especially given rock-bottom price tags and interest rates. Far more intriguing to companies, however, are the opportunities presented by sale-leaseback arrangements. These deals have flowered in the last few years, although proposed changes to lease-accounting rules may take the bloom off the rose for some.

Finance chiefs who have recently negotiated leases have come away smiling. Cosmo Alberico, executive vice president and CFO of Odyssey Logistics and Technology, recently renegotiated the lease on the company’s Danbury, Connecticut, headquarters building, locking in a five-year deal at a 27% savings. An eight-year-old logistics and transportation services provider, Odyssey wanted to stay put rather than incur the expense and headaches of moving to another location, says Alberico.

The privately held company renegotiated its lease not through its real estate broker but directly with its landlord, an arrangement that suited both parties. “He knew he’d save the 5% annual broker’s commission, and I knew that he didn’t want to risk losing us as a tenant,” says Alberico. But the CFO didn’t go behind the broker’s back: in fact, he asked the broker to compile data on other leases for comparable space, which it did free of charge. (The broker was happy to comply: Odyssey is growing and sees a bigger physical footprint in its future, portending more business for the broker.)

Vacancy rates and lease expirations are up; rental rates are falling.

The lease data gave Alberico the upper hand with the landlord. “I had leverage to get a great deal, well below market rate,” he says.

Odyssey’s experience is writ large across the landscape, says Marisa Manley, president of Commercial Tenant Real Estate, a New York–based real estate advisory firm. “We’re seeing an average 30% in savings in terms of lower face [that is, contract] rents, greater cash contributions by building owners to build out a tenant’s space, and just better deals, such as the ability to expand into additional space without having to pay for it today,” she reports. “We just worked on a lease where the landlord charged $50 a square foot and was willing to finance $10 per square foot for the tenant. That’s the kind of leverage tenants have today.”

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