Choosing the right office lease can feel like rolling the dice. Do you play it safe with a shorter 3-year term or go all-in on a 10-year commitment?
As a business owner, you know that your lease isn’t just a formality—it’s a strategic move that can shape your company’s future. The length of the lease impacts everything from your monthly rent to your ability to downsize, expand or relocate and is the kind of choice that can keep you up at night. After all, your lease will reflect a multiyear expense that will be your greatest expense apart from the cost of labor/salaries.
So should you request a 3-year, 5-year, or 10-year office lease? It’s a question without a simple answer but one that deserves careful consideration. That’s why we decided to focus this article on the pros and cons of each lease term. We’ll look at how the length of your agreement can influence your operational costs, negotiating power, and peace of mind.
The 3-Year Office Lease Option
If you’re a startup or a rapidly growing company, a short-term lease might just be the strategic move you need. It offers the flexibility to navigate economic uncertainties without locking you into a long-term commitment, allowing your business the room to evolve. But, of course, it’s not without its downsides—from potential rent hikes to fewer customizations from your landlord.
Advantages
- Flexibility in an Unpredictable Market: A shorter lease term, like 3 years, allows businesses to adapt more quickly to market conditions. Businesses aren’t locked into a long-term lease if rents drop or their business changes.
- Potential for Lower Rent: If the landlord lowers the rent during the lease term, you can renegotiate the terms or search for a new space at a lower cost once the lease ends. This way, you’re not locked into a longer lease with higher rent.
- Business Changes: Your business may evolve. You may need more space, less space, or a different kind of space. A 3-year lease allows for reassessing business needs and making appropriate changes more frequently.
- Less Financial Commitment: A shorter lease term means less long-term financial commitment. This advantage can be particularly beneficial if you’re a startup or small business with limited capital.
- Trial Period: If your business is a startup or moving to a new area, a 3-year lease can serve as a trial period that tests the location without a long-term commitment.
Disadvantages
- Potential for Higher Rents Upon Renewal: If market rents increase, your landlord could raise rents at renewal time. They know that moving is expensive and inconvenient for you, and they may take advantage of it.
- Limited Investment from Landlords for Improvements: Typically on a 3 year term landlords only provide cosmetic improvements such as a paint job and new carpet. They may hesitate to fund major renovations or build-outs. So, if you’re hoping for your dream office or those stunning floor-to-ceiling glass walls without footing the bill, think again.
- Lack of Stability: A shorter lease term means you’ll be facing the possibility of having to move more frequently, which can disrupt your business.
- Limited Negotiating Power: With a shorter lease, you may have less leverage to negotiate terms and conditions, such as rent abatements, customization of your space, construction of your office beyond cosmetics, or favorable renewal terms.
- Challenging to Plan Ahead: It can be challenging to make long-term business plans when you’re unsure of your location stability. Moreover, it can make it harder to budget for future expenses.
Opting for a 5-Year Office Lease
Think of a 5-year office lease as having your cake and eating it too: you get the security of knowing where you’ll be for the next five years without chaining yourself down forever. Plus, the perks can be beneficial, from rent control to build-out contributions from landlords. But it has pitfalls, like potential overpay in a dipping market or finding yourself cramped for space as your business booms.
Advantages
- More Stability: A 5-year lease provides more stability than a 3-year lease. Knowing that you have a secure location for the next 5 years, you can confidently plan for the future.
- Less Long-Term Commitment: While it offers stability, a 5-year lease doesn’t tie you down for an extremely long period. If your business is expanding and you anticipate needing more space in the future, this is a prime advantage.
- Greater Concessions: Landlords are often more willing to offer concessions for longer-term leases. These could include a free rent period, contribution to build-out costs, or more favorable lease terms.
- Cost Predictability: Negotiating a 5-year lease can offer a clearer financial forecast for your business. While the lease term itself might not dictate the specifics of rent increases, having a set term allows you to discuss and agree on a predictable rent escalation schedule upfront.
- Focus on Business Growth: With the location secured for a longer period, businesses can focus more on operations, customer service, and expansion rather than worrying about finding a new location or negotiating lease terms frequently.
Disadvantages
- Risk of Market Changes: If the market changes and rents decrease significantly, you could pay above-market rent for the remainder of your lease term. Consider also if the drop in rents is due to a downturn in the economy or industry, which could also impact your revenues.
- Lack of Flexibility: A 5-year lease term may not provide the flexibility you need if your business is in a rapidly changing industry or you’re a startup still figuring things out. If your business grows faster than expected, you could outgrow your space before your lease ends. Conversely, if your business contracts, you could end up paying for space you don’t need.
- Potential for Higher Costs: Some landlords may charge higher rents for shorter lease terms, as they have to factor in the potential cost and inconvenience of finding a new tenant in 5 years.
- Capital Investment Loss: If you invest significantly in improving or customizing the leased space, you risk losing that investment if you do not renew the lease after 5 years.
- Liability: If your business faces any financial difficulties, a longer lease term means a longer period of liability.
The 10-Year Office Lease Decision
Finally, think of a 10-year office lease as your business’s way of planting deep roots. It’s like grabbing the best seat in the house before the show starts—you lock in your costs, snag more concessions from landlords, and just focus on growing your business. But remember, it’s a bit like getting a tattoo on your business’s arm; you’re in it for the long run, with less room to adapt if things change.
Advantages
- Long-term Stability and Predictability: With a 10-year lease, your rental costs are often stable. Consider how much easier your financial planning will be with a longer lease, especially if your business needs to budget expenses over an extended period.
- Greater Leverage in Negotiating Improvements and Concessions: Landlords are likelier to allow or even finance improvements and customization on long-term leases. They may also offer concessions to tenants willing to sign longer-term leases.
- Locking in Lower Rents: If you believe rental rates will increase significantly over time, a 10-year lease can help you lock in lower rents and protect your business from market fluctuations.
- Peace of Mind: A longer office lease means consistent rental income and reduced turnover for landlords. For you, a tenant, it means peace of mind knowing you have a stable place to call home for a decade.
- Avoiding the Costs of Moving or Refitting Space: With a longer lease, you don’t have to refit your space as often or pay to move to a new location.
Disadvantages
- Less Flexibility to Adapt to Market Changes: A long-term lease can limit your ability to move into a different building or neighborhood. If your business grows or shrinks significantly, you may find yourself stuck in a space that is too small or too large. Subleasing is always an option, but that’s just another thing on your plate to worry about.
- Risk of Being Locked into Above-Market Rates: Real estate markets always change. If you believe the market will soften further in the long term, you could find yourself paying above-market rates for the duration of your lease.
- Long-Term Liability: With a 10-year lease, you’re in it for the long haul. Keep in mind that you could always sublet. Moreover, should you outgrow the space, the landlord will generally relocate you to larger space in the building with no penalty at all. But be sure you do your due diligence and that you’re prepared for a long-term relationship.
- Increased Maintenance and Repairs Costs: As your lease term progresses, wear and tear on your build-out is inevitable, and you might need to modify the layout to fit changing needs. However, landlords typically won’t cover these modification costs mid-lease. Such improvements are usually up for negotiation during lease renewal or if you’re considering an extension.
- Risk of Early Cancellation: If you choose to break your lease early, expect to make an early cancellation payment.
Final Words on Weighing Your Options
Picking a lease term is a big decision, especially in a city like New York, where the real estate market moves fast. Go with a short 3-year lease, and you have the flexibility to change things up if your business needs evolve. But if you choose a longer 5 or 10-year lease, you’re committing to stay put, which can be great for stability but a bit risky if the market goes south or your business changes direction. So, how can you make the best decision for your business’s future?
Don’t go at it alone. Always do your due diligence, but working with a broker can come in handy and help you make the most informed choice. Brokers, of course, can help you find a space in an ideal location. But they’re equally helpful in guiding you on which lease best suits your business.
