Presentation by Rick Lowe and Brandon Leitner of Cresa Boston, 10/29/15
Summary: It’s no secret that Boston’s real estate market is booming. What does this mean for your nonprofit? Please join Rick Lowe and Brandon Leitner, from Cresa Boston, to learn more about the current Boston area real estate market and strategies that any nonprofit can employ to manage office space costs. Rick and Brandon will provide an overview of the Boston area real estate market and the implications for nonprofits, discuss strategies that tenants can employ now to control their costs, things to consider if you have a lease expiring in the next few years, and what resources are available to help.
- Boston Commercial Real Estate Market Overview
- Boston is hot: Commercial tenants are moving into central Boston from Cambridge and the suburbs. More than a third of the tenants seeking downtown space are new–i.e., they don’t already have a presence in Boston.
- Back Bay vacancy rate higher among downtown areas: Several large tenants are moving from the Back Bay to the Financial District. They have noticed a flattening of activity in the Back Bay.
- Downtown rents going up fast: Other than the Back Bay, vacancy rates in downtown neighborhoods (which they define as the Financial District, Back Bay, Seaport/South Station, and North Station) are in the single digits. Rents have been rising rapidly, especially for “Class B” office space, which has pushed past $40 per square foot.
- Tech invasion: Tech firms represent a third of those looking for 5,000-10,000 square feet of Class B space in downtown Boston.
- Downtown Crossing is fading as a value niche for nonprofit organizations.
- Space near transportation hubs, such as South and North Stations, is attracting the most demand.
- What to Look For as a Tenant
- Maintaining a balance between reducing costs and maintaining your workforce: Access to transportation hubs?
- Know the landlords’ profit centers
- Right-sizing: Don’t rent more than you need. Consider ways to reduce your footprint, such as creating multipurpose space. Investing in the right furniture can help you use your space more efficiently. Pay attention to the difference between usable square feet and rentable square feet. The difference can be 20-30%.
- Know the rent: Go to the market and get other offers. Lowering your starting rent can make a big difference over the course of the lease.
- Free rent? Sometimes landlords offer free rent initially to offset your relocation costs–though it’s less common in this market.
- Tenant improvement allowance: Landlords receive the tax break regardless of whether improvements are being made. Negotiate either to put it to use, or to get a reduction in rent.
- Base building: Will you or the landlord be responsible for maintaining infrastructure, electrical, HVAC? Try to make the landlord responsible for HVAC. If the tenant is responsible, know the age of the systems and factor in replacement. Enough capacity? As we make do with less square footage, we squeeze more infrastructure needs (electrical, networking) into less space.
- Real estate tax and operating expenses: In many leases, landlord pays base real estate tax and operating expense; tenant pays for escalation. If you’re renewing, it’s important to set a new base year. If possible, push the base year out as far as possible, 12-18 months, if you can. Get a history of operating costs over the past 2-3 years. (And when you get the bill for escalation, scrutinize and challenge what the landlord includes.)
- Commission: Representation cost of $1.50 psf is often built into rent. If you don’t use a broker, try to get this back.
- Security deposit: Show them your financial reports and/or get a letter of credit from your bank–and push to lower or eliminate your security deposit. If you’re renewing, reference your track record of paying rent on time.
- If you get representation, look for someone who only works for tenants. Most real estate agents represent both landlords and tenants, and their interests can be divided.
- Your highest point of leverage, as a tenant, is when you’re negotiating or renegotiating–when you’re a free agent. Mark the lease extension date, which is often 12 months before the lease expires. Get a letter of intent from the landlord before the extension date.
- The Real Estate Process
- Strategic planning
- Zip code analysis: Where do your employees live?
- Space programming: Analyze functions in detail, and right-size your space needs
- Project schedule: 12 months or more
- Due diligence
- Market survey and tours
- Requests for proposals
- Construction estimates
- Acquisition
- Financial analysis: Costing out options
- Letter of intent: This sets forth the terms of your agreement before the lease is written. Very important to get this down in writing.
- Lease negotiations
- Implementation
- Design: Keep in mind that pulling the needed permits can take a long time
- Construction
- Occupancy: If occupancy is delayed and you need to remain in your former space, a holdover clause will probably apply. You may be paying double rent in your old space.
- Tenant Tips
- Be proactive, not reactive.
- Right-sizing:
- Organizations moving to 100 sf spaces
- More egalitarian plans: Same amount of space for employees
- Open seating: No assigned seating, but take available workstation
- Example: Zipcar has lockers for people’s personal stuff
- Let technology help you.
- Less space needed for computers, monitors, phones
- Purge paper; shrink file storage
- Don’t let real estate drive your business.
- What goes up must come down: The market will peak sometime. It’s near a high, but will come down. While it’s high, try to avoid a long-term lease. If possible, negotiate termination rights. Subleases can be an option.
- Don’t let the linebacker into the huddle: Control the flow of information, and be aware of who knows you’re looking.
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