Space Acquisition Process: When to Start

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When should a tenant or buyer begin their search for commercial space? The answer to this question depends on a number of factors, but in general the more time a user gives themselves the better. A compressed timeframe puts pressure on the user to acquire space quickly to either begin business operations or ensure the continuity thereof. Tenants or buyers that provide themselves with adequate time can methodically and intelligently locate the best possible space and negotiate the most advantageous terms.

Perhaps the most driving factor impacting the timeline allotted to the space acquisition process is existing lease expiration dates. Tenants may have the option of renewing their existing lease either by way of a renewal option or through simple negotiations with the landlord.  In the case of renewal options, tenants will be required to provide notice of their election to exercise their renewal right which may range from a few months to a year. If the landlord has other plans for the space tenants may be required to vacate at the end of the lease term or incur holdover penalties in addition to other damages incurred by the landlord. It is important for tenants to know if staying in place is an option when deciding when they need to begin the search process.

The nature of the tenant’s business and asset class will also impact runway time needed. Office users can generally give themselves less time due to the uniformity of most office build outs and relative abundance of options. Retail users, on the other hand, must place special emphasis on location within a submarket/trade area as well as within the retail project itself. Many retail landlords provide exclusivity provisions to existing tenants which prevents another similar user from leasing space in the same center. The more specific and unique the requirement the less options and thus more time required to find a space that works.

Another factor influencing the space acquisition timeline is whether or not the space will require modification. Depending on the locality the build out process may be lengthy, in some cases taking 6 months or longer. Drawings will need to be prepared by an architect, approved by both the landlord and tenant, and then submitted to the applicable municipality for review and approval after which permits are granted so that construction can begin. The construction timeline can then vary based on the experience of the contractor, availability of materials, complexity of the build out, etc. If a user is looking to take a space as-is they can allow for less time.

The length of lease term is a related matter. If a tenant is only interested in a short-term lease (less than 5 years) they can allow themselves less time to acquire space. Without adequate time over which to amortize their costs, neither tenants nor landlords will be willing to invest capital into a costly build out. Tenants that are looking for short-term leases will most likely be required to take the space as-is or with minimal improvements. Usually limited to paint and carpet/flooring and/or minor demo, such work does not require permits and can be completed quickly.

Market conditions and inventory should also be considered before beginning the space acquisition process. In a landlord’s market, categorized by low vacancies (low supply/high demand), tenants will need to give themselves more time to find space. If key elements of a user’s requirements such as square footage, budget, location, etc. are relatively inflexible then tenants may be forced to wait for new inventory to become available.

Determining the right amount of time to give to the space acquisition process is more of an art than a science. Users must weigh a number of internal and external factors that will impact the time in which they can identify, acquire, and occupy suitable space. In a perfect world, users would be able to take space that works as-is and begin beneficial occupancy on 1) the day they would like to open for business or 2) the first day of the month after their current lease expiration date.  In an imperfect world, businesses must balance between giving themselves too much time, potentially reducing the amount of rental abatement they can negotiate, and too little time in which case they may be unable to find space that works or forced into taking space under less than ideal conditions. In general, it’s better to give yourself more time than less so that you’re not putting short-term needs ahead of long-term goals.

Perhaps the best practice is to reverse engineer the process; working back through the construction process, lease negotiations, letter of intent negotiations, identification period, and requirements gathering and then assigning timelines to each step based on the internal and external factors previously discussed. After adding it all up, businesses may be surprised by how long it may take for them to comfortably acquire space. It’s always advisable to work with an experienced commercial real estate broker who can help you assign accurate timelines for each step based on your specific needs and market conditions within the applicable submarket.

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