How far out from a lease expiry should you start looking to renew your lease or relocate?

Co-written by Harry Kindred and Stephen Chronopoulos, Managers within the Occupier Services team at Colliers International

 

As Tenant Advisors, we are constantly engaging with industrial tenants and occupiers who are looking to renew or relocate their operations and unfortunately, many leave themselves with insufficient time to find the cost savings, incentives and operational efficiencies they desire.

 

The value of time and its impact on a property strategy can provide you with an unparalleled leverage to negotiate your lease, whether that be for a renewal or a relocation.

 

To avoid getting caught out and losing your leverage to negotiate, we have put together the following guide for industrial tenants on how much time is required for a relocation or lease renewal in the current market.

 

We have covered the four most common lease types for industrial occupiers:

 

  1. Leasing a purpose-built facility (pre-lease)
  2. Leasing a speculative development
  3. Leasing an existing building
  4. Renewing a lease in your current facility

 

 

  • Leasing a purpose-built (pre-lease) facility

 

18-24 months required

 

Pre-lease facilities provide a good opportunity for occupiers to upgrade their facilities, particularly occupiers with specialised operations who are unlikely to find a suitable existing facility. In many cases, a pre-lease facility can be a cheaper and more desirable option for tenants.

 

Whilst the construction of the facility requires the most time, it is critical to allow sufficient time at the start of the process to determine the businesses precise spatial needs. As the market tightens and rents increase, occupiers are increasingly engaging project engineers to generate cost savings through innovative building design and automation. Taking the time to develop a refined brief will also assist in streamlining your requirement to potential developers.

 

When preparing to run a pre-lease process, it is critical to plan and execute a timeline aligned to your lease expiry. As Tenant Advisors, we are always mindful of both lease legacy exposure (causing rental overlap) and the lease tail running out (leaving you with no planned accommodation). As such, we recommend allowing 18-24 months from engaging with the market to lease commencement and building occupation.

 

 

  • Leasing a speculative development (spec build)

 

12 months required

 

In particular markets such as Sydney where demand continues to outstrip supply and vacancy declines, developers are becoming more confident with speculative developments, which are achieving strong leasing results prior to completion. As the name suggests, speculative development occurs when tight market conditions with low vacancy levels provide developers with confidence to commence construction prior to securing a lease commitment.

 

As the success of speculatively built developments is heavily dependent on market conditions, tenants should never rely on this as a fall back option. However, in instances where the tenant has not allowed sufficient time to complete a full pre-lease campaign there can be opportunities to secure a spec building.

 

As they are generally already under construction, the earlier you are able to commit, the more control you will have over the design process. For occupiers with specialised requirements, this can have a significant impact on the efficiency of your facility and business, so the earlier you are involved the better.

 

If a tenant identifies a suitable spec development, we generally recommend an allowance of 12 months to complete the end to end transaction.

 

 

  • Leasing an existing building

 

9 – 12 months required

 

While pre-commitment and spec build facilities are a viable option for tenants looking to secure a long-term lease (typically 5 years+ for generic sheds and a minimum of 10 years for specialised facilities e.g. built for cold storage users or cross stock users), existing buildings are a more viable option for tenants unable to forecast their spatial requirements. An occupier may be looking for a flexible or short-term solution due to business expansion, contraction or advances within the sector.

 

To relocate to an existing facility, we recommend allowing at least 9-12 months from the expiry date and running a whole of market process to create strong leverage and receive the best deal possible. Not engaging early enough with the market can leave you open to taking a facility that is not aligned to your needs and will diminish your leverage throughout the negotiation process to drive the best deal possible.

 

 

  • Renewing a lease

 

At least 9 months

 

Finally, for occupiers who would like to renew the lease within their current facility we recommend allowing at least nine months. Often occupiers renewing at their current location are lulled into a false sense of security as a renewal means no relocation costs, make good or loss of staff in relocating.

However, if you fail to run a proper market process and force your existing landlord into competing for your ongoing business, an untested renewal is likely to result in higher rents and little incentive.

 

We are often appointed by clients to assist in negotiations after they have engaged with the landlord, and in most of these circumstances the tenant has already been presented with commercial terms that are strongly in favour of the landlord. In order to secure the best possible result, we recommend running an open market process for all options, this educates the occupier on average rentals and incentives, whilst obliging the existing landlord to compete in the open market to retain the tenant. This process often delivers tangible savings for occupiers through renegotiation. In our experience an experienced property professional, such as a Tenant Advisor, achieves significantly higher cost savings and favourable terms than the tenant negotiating directly.

 

Consider the above options next time your organisation approaches 18-24 months from the lease expiry on your industrial site and if you wish to speak with an Industrial Tenant Advisor get in contact.

 

Stephen Chronopoulos

Stephen.Chronopoulos@colliers.com

0468 703 021

 

Harry Kindred

Harry.Kindred@colliers.com

0439 495 855

 

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