Rental costs are generally amongst a company’s biggest expenses. A substantial amount of money is paid over in the way of rental by businesses to occupy a property and run their operation. In the case of industrial properties, which include warehouses and factories, these properties are generally large in size and rental is paid on a square metre basis meaning high rentals. It should be a priority of any tenant to ensure that the rental they pay is both affordable and that the rental is in accordance with the size and type of property required. There are a number of considerations that should be taken into account and ways to save money on your lease before a tenant commits to looking for a property, let alone commits to signing a binding lease agreement.
The need for moving
Moving premises attracts major direct and indirect costs and should be for a legitimate business requirement. These may include:
- Expansion (the operational needs are not being met at the current site and there is no opportunity to expand the premises or occupy another adjacent property resulting in restricted business and growth limitation)
- Downsizing (the current warehouse/factory/office space is now too big resulting in wasted space and unnecessarily high rental and operating costs being paid, this can be due to changes in the economy, increased competition, company restructuring, or new technology, amongst other reasons)
- Consolidation (the business operates from different sites and management feel the business can operate from one consolidated site encompassing all the current operations. This can also happen when a business buys or acquires a competing business or supply chain partner
- Change in area the operation needs to move for geographic reasons, this may be to be closer to the client base, supplier, or work force.
Location, Location, Location
Location is the first consideration, factors that influence choice of areas include location of clients, suppliers, labour force, and available infrastructure within specific areas. Certain industries have zoning limitations e.g. They exclude noxious industries. Only certain industrial areas cater to this. Other considerations include access to freeways, access to airports and general traffic conditions. Newer industrial areas have limited power availability compared to older areas and these areas are more suited to logistics and warehousing as opposed to heavier users involved in fabrication and engineering. Once the location is decided then one can narrow down the area, even areas in close proximity to one another can have vastly different asking rentals. Eg. Wynberg and Linbro Park, Eastleigh and Longmeadow.
Size of facility
Calculating the correct amount of space involves taking into consideration current needs as well as growth expectations because most lease agreements are long term. Determining the warehouse space for example in the case of a logistics operation would be determined by the number of goods needed to be stored at a given time, but for a factory it would be taking into consideration the layout of machinery and the production cycle. Office needs can sometimes be more difficult to calculate and in this case a space planner can be appointed to help determine the optimum use of space. Maximisation of space and efficient space planning means less rentable area and in turn, lower rental.
Grade and specification of building
Another consideration is the age and general spec of the facility. Modern day logistics operations require a higher spec warehouse in order to operate efficiently, these facilities have improved flooring, better height for racking, fire protection, large yard areas and access for articulated vehicles. They can also offer green technology including LED lighting or solar panels in order to reduce energy costs. These properties are also more expensive than older facilities because of their construction costs yet still make more financial sense for specialist logistics companies. This type of facility would not usually make sense for a manufacturer who concern is infrastructure and practicality, it would make more sense to look for an older, heavy industrial property that may not have the height and access but has high power availability and reinforced foundations and possibly gantries for overhead cranes. These older facilities usually have lower asking rentals as well.
Length of lease
Generally the longer a lease you sign, the more you can negotiate on the rental, and the more assistance in the form of fitout or beneficial occupation you are likely to receive from the landlord. Escalation rates also tend to be lower with long term leases as opposed to short term leases. Taking into consideration all of this, together with the cost of moving and downtime it makes sense to rather negotiate a longer term lease. But what about flexibility? What if your needs change? This is where landlord selection can also play a factor. Larger landlords and funds can offer moving to another property within their portfolio and release you from your existing lease if you enter into a new lease with them. This arrangement is mutually beneficial as you have the flexibility to move and they can retain you as a tenant in their portfolio. They may also be able to offer you a new custom development to suit your needs.
Once you have a sound understanding of your property needs then appointing a broker to help source the property and negotiate the best deal is the next step. A qualified broker can match the right property to your needs taking into consideration what area you want to be in, the size and spec of the facility, and the type of lease you want to sign. They can also assist you with understanding the lease agreement and your obligations. Appointing a broker carries no risk as they are paid commission by the landlord once a deal is finalised and all suspensive conditions have been met.
Consider that the difference between a 7% and 8% annual escalation on R100 000 a month rental over 5 years is a R140 000 saving over the course of your lease. It literally pays you to negotiate.
Take the first step and contact us now to see how we can show you how to save money on your lease.
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