In the big picture of CRE, most people think about brokers, landlords, and leases. People think about the “big” commissions that are earned upon lease signature. The money tied to the lease and the number of years committed to are eye catching.
The reality is, the lease is a relatively minor activity in the scheme of CRE. It may be where the money is but it certainly isn’t the real star of the CRE show. Think of all the things that need to be figured out before you even get there (whether they are actually figured out or not is a separate question):
- Business operating model justifying a location in a certain location. Is the physical location important for hiring of labor or attracting customers? Or is the location important to mitigate risk by separating functions into multiple sites?
- How many people are currently expected to be located at this site? How many are expected to be there at the end of the lease? How is growth forecasted to come about?
- How will people work at the site? Will they require offices and specialized equipment? How much space is required to fit them in – minimum and desired space?
- Is this a new function or continuation of operations already underway? If new, how certain are we with our projections and do we need to minimize long-term risk by increasing short-term costs? If existing, is the business conditions that caused us to locate here still in effect?
- Many specialized questions based on the type of asset being leased (office, warehouse, call center, parking).
In the grand scheme of things, negotiating an extra dollar reduction per square foot of a lease is relatively small. It just happens that it can be measured while most of the other things above cannot. It also happens to be that that’s where the costs/revenues to third parties occur making it a big deal. It also happens to be tied to the lease that without means you can’t operate.
The lease is important but it certainly isn’t the real star of the CRE show.