Leveraging Market Timing to Reduce Costs

Facts

  • A company had 2 offices located in prime locations in London and Manhattan, each with lease expiration in 2007. The London property, 120,000 square feet, was occupied entirely by the company; the Manhattan property was in a large multi-tenant building where the company leased 420,000 square feet
  • In New York, the company wanted to downsize its space and in London the company was short on space
  • In both cases, the company did not know whether to move to newly constructed buildings or stay in the current premises, and whether to do an early transaction or wait until lease expiration
  • In London, leases contain upwards only rent reviews to market every 5 years; in New York, leases contain fixed structured increases
  • In both cities, the buildings were in need of capital upgrades.

Process and Result

Market search. A thorough investigation of relocation options to newly constructed top quality buildings was undertaken with the help of a broker. It also became clear that the market was at a plateau level and with a shortage of good supply, it was poised to get stronger.

Building upgrades. An engineer was engaged to recommend upgrades to the existing buildings’ HVAC, elevator and security systems. In addition, in London an architectural study produced new ideas on how to occupy the space more densely.

Comparative negotiation against new buildings. Beginning with a Request for Proposal to several buildings, an iterative multiple-round negotiation process occurred, pitting the new buildings against the currently occupied buildings.

Final leases. The company stayed in the current buildings in both New York and London. The renegotiated leases provided:

  • Structured rental rates for a 10 year period
  • Cash allowances or other improvements to the building quality
  • In New York, downsized space without penalty, with the provision of future growth options.

Financial Impact. The savings under the renegotiated leases, when compared to 2007 market prices (at original lease expiration) were

  • $50 per foot in NY ($18 million annually)
  • £40 per foot in London ($9.6 million annually).