Go Long or Short? Market Changes Affect Office Leasing Decisions

Go Long or Short? Market Changes Affect Office Leasing Decisions

Corporate tenants make office leasing decisions based on market fluctuations, which also determine if they choose a short or long lease.

Short-Term vs. Long-Term Leases for Corporate Tenancies

When leasing office space, companies have the option to choose between short-term or long-term tenancies. For many corporate entities, leasing costs constitute a significant portion of their expenses. The commercial real estate sector is more sensitive to market changes than multifamily developments in residential real estate. The global economy has now experienced three years of consistent growth. A strong economy correlates to higher rents because companies are enjoying wider profit margins, and there are more commercial real estate jobs. Another factor is municipal governments' renewed commitment to meeting energy efficiency standards. This leads to an increase in construction and refurbishment costs for the real estate development companies.

Short-Term Leases and Financial Flexibility

Despite advances in artificial intelligence for real estate and business intelligence for real estate, new businesses cannot predict long-term financial success. That's why they opt for short-term leases that they can renew if the business becomes successful. Accounting standards require that businesses list long-term leases as a financial liability. Long-term leases have a higher aggregate value, which negatively affects the company's balance sheet.

Some companies change the terminology of the lease agreement to avoid this problem, classifying the tenancy as a service agreement rather than a lease. The difference between a lease and a service agreement is that the landlord does not turn over control of the premises to the tenant. Larger companies can also benefit from short-term leases because the business owners are concerned about being unable to afford a lease renewal at higher prices after only a short time period.

Stability and Long-Term Leases

Long-term leases are ideal for business owners who want to pay a lower annual rent spread out over a longer period of time. In exchange for providing the property owner with guaranteed income for the long lease period, the tenant has the bargaining power to demand potential expansion rights. Long-term leases are also the solution to the "above market trap" in which projected rent increases are higher than the going market rate for similar properties. Location intelligence for real estate can be a way to calculate market rate fluctuations for annual commercial lease payments.

Co-working also directly affects a business owner's willingness to enter into a long-term lease. Co-working leases can be up to 10 years longer than the standard long-term lease. Co-working is a joint venture between multiple businesses operating out of the same space and sharing costs. If the co-working trend loses popularity, then shorter-term leases could make a comeback in the field of real estate development. Trend analysis and predictions will become easier with artificial intelligence real estate technology.

If your business is looking to lease, make sure to take advantage of real estate intelligence, and consider these points when deciding if a long- or a short-term lease is the best option.

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