February 22, 2001

Tenant’s lament: should I stay or should I go?

Clash Design faces a dilemma: renew its lease at twice the current rent or begin searching for office alternatives.

This decision requires a detailed analysis of the firm’s priorities and goals for the coming decade. Clash’s situation, shared by hundreds of established downtown Seattle firms, raises the question: “Should I stay or should I go?”

This indecision’s bugging me ...

Clash’s principal, Roxy Casbah, shakes her head in disbelief at the landlord’s quoted renewal rate of $44 per square foot. Not only has the rental rate for her 15,000-square-foot space more than doubled, but Casbah is surprised that her landlord would approach her now regarding her December 2002 renewal, especially considering the onslaught of news about the large amount of sublease space currently on the market.

However, in talking with neighboring tenants, Casbah learns she is not alone in facing such daunting renewal terms so early. It’s wise to begin contemplating Clash’s needs now, since available space in December 2002 could still be limited.

To help her through the process, Casbah selects a broker who demonstrates a range of experience with similar firms and an extensive knowledge of the downtown Seattle market. This broker is eager to assist Casbah in a thorough analysis of office alternatives, exploring both the advantages and disadvantages of renewing and moving.

Exactly who’m I supposed to be?

Casbah compiles the following list after being urged by her broker to consider her firm’s sense of identity. She rates by importance her top five concerns in finding Clash’s ideal office space:

• Economics

• Image

• Technology capacity

• Location/Employee satisfaction

• Landlord responsiveness

The broker then notes that each of Casbah’s priorities falls into two general categories: economic considerations and aesthetic considerations.

Economic considerations

Rent. As Casbah and her broker prepare a list of buildings to tour, rental rate remains a great concern. Her broker warns that Class A rates in the Seattle central business district will not vary greatly; a lesser-quality or periphery building is necessary in order to achieve maximum savings. Casbah reluctantly decides to stick with Class A product in the CBD in an effort to preserve Clash’s established image.

Pros and Cons:

Pros of staying: No move disruption No moving costs Employee retention may be higher No risk of diminishing firm image Cons of staying: High rental rate Current space configuration may not work Pros of moving: Possibility for lower rental rate Chance to reconfigure space Chance to reinvent firm’s image Chance to expand or reduce in size Employee recruitment may be higher Cons of moving: Moving costs Disruption of business

Tenant improvements. Casbah examines the layout of each space. If it does not seem to work, she asks if the landlord will be providing a tenant improvement allowance that will cover her costs to reconfigure the space in a more efficient manner. Her broker informs her that most TI allowances are minimal ($5 to $10 per rentable square foot) and not usually enough to cover the total TI cost, even when dealing with the larger allowances ($20 to $30 prsf) given for newly constructed buildings. Clash will need to pay for any overage; this payment can be made up front or, at times, amortized over the course of the lease term.

Load factor. The load factor represents the building common area (such as bathrooms or elevator lobbies) a tenant must pay for, in addition to the actual square footage occupied. Casbah finds that load factors vary greatly by building. The load factor will ultimately affect the total square footage on which she pays rent, a significant economic factor to consider.

Additionally, in considering a possible renewal, Casbah figures that she may have significant inefficiencies within her current space that have required Clash to lease more space than it needs. She is urged to consider the ergonomics of Clash’s space and how it might be redesigned for efficiency within the existing space or elsewhere.

Technology capacity. To stay on the cutting edge of the design industry, Clash needs access to technology and the ability to manipulate it. Therefore, at each building, Casbah inquires about technology capacity, the number of providers and the landlord’s flexibility in working with tenants. Clash’s ability to function would be greatly affected in a building with one provider of T1 lines and an inflexible landlord, rather than a building with 10 different fiber providers and a landlord willing to accommodate tenants’ needs. Casbah recognizes that Clash’s future is closely linked to the technology capacity of the building she selects.

Moving costs. Casbah learns that moving costs are another significant economic factor. Should she decide to move the firm, Clash will pay to physically move and change the firm’s collateral material, as well as recreate or add to the existing technological infrastructure in the new space. Casbah’s broker provides Clash a moving cost estimate of approximately $6 to $7 prsf.

Aesthetic considerations

Image. Casbah wants to be certain that each building’s image matches the image portrayed by her firm. If the building’s image does not correspond with Clash’s image, the building may be ruled out immediately. In order to justify a move, the new building must give Clash Design an opportunity to reinvent itself in exciting new ways.

Location/Employee satisfaction. Casbah informs her broker that she can be flexible about location as long as her current employees can still get to work easily. Casbah considers the availability and cost of onsite parking, as well as proximity to amenities such as the bus tunnel, restaurants, retail services and health clubs. If Clash Design moves, Casbah wants a location that will assist in both employee retention and recruitment.

Landlord responsiveness. While touring, Casbah pays close attention to the landlord representative. She knows that the tour will surely reflect on how Casbah Design will be treated as a tenant in the building. She feels that it is imperative that she leases space from a landlord who is responsive, flexible, professional and experienced. Casbah recognizes the extraordinary difference that a landlord can make.

I’ll be here ‘til the end of time

After reviewing 10 different buildings, Casbah returns to her office to analyze her data. She understands that she is about to make a decision that will affect the success of her firm for years to come.

Upon evaluating the pros and cons (see Table A) of staying versus moving, Casbah realizes that if she moves Clash Design, she must find a new space with a rental rate that is low enough to offset her moving costs, technology costs and general business disruption, while also maintaining her employee base and the firm’s image. Armed with the information that Casbah and her broker have gathered regarding Clash Design’s options, Casbah feels prepared to make a very significant and complex decision ... Should I stay or should I go?

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