Real Estate Now

Alba Aleman is moving on up. She recently signed a four-year sublease for 14,000 square feet of luxurious, Class A office space. Though the building in Chantilly, Va., is owned by a 24-hour shipping company, it feels more like a law office. The executive suites are furnished with cherry wood furniture, and the boardrooms are equipped with great new audio-visual equipment. There are even two kitchens with icemakers and dishwashers. The fancy digs are also in the perfect location for Cairo Corp., the fast-growing IT consultancy Aleman co-founded in 1998. It's a short drive to Dulles Airport, downtown Washington, D.C., and the suburban Virginia outposts of corporations like Oracle, Lockheed Martin, and AOL.

The best part about all of this is that Aleman is paying the same price per square foot as she was for her previous offices -- and they were in Class B space above a credit union in distant Manassas, Va., land of dreary industrial parks and strip malls. That old office smelled funny. It had mismatched carpet that was worn and stained and peeling wallpaper in the stairwell. But back in October 2000 when Aleman signed the lease, commercial real estate was high-priced and hard to come by, and it was all she could afford. This time, "I was floored at what we were able to get," says Aleman. "The impression this office gives is so starkly different."

How times have changed. All over the country, entrepreneurs who signed five-year leases in 1999 and 2000, when rents peaked, say they're amazed at the trade-ups they're able to make because of the soft commercial rental market. In fact, right now is the optimal time to sign a lease. Vacancy rates are higher than they've been in 10 years, according to the Real Estate Research Corp. (RERC). The national average is 17%, though some areas are in the twenties. The price per square foot has also valleyed around $26 across the country, and the median is $21.

"We're in a new era," says Roger Staubach. "Tenants have more choices and there's more competition..."

Historically low interest rates helped to drive the trend by luring more companies to snap up commercial property before the party was over. That surge in buying activity left fewer companies looking to lease space, creating a classic renter's market. Adding to the glut are subleasing opportunities created by many companies (both the downsized and the optimistic) that have unused space they'd like help paying for. As interest rates climb over the next two years, RERC projects that vacancies will decline and prices will increase slightly. In the meantime, landlords are eager to please. Offers of free rent, parking, and other amenities are now standard, says Roger Staubach, who runs one of the largest commercial brokerages in the country that represents only tenants. "We're in a new era," says the legendary Dallas Cowboys quarterback cum entrepreneur. "Tenants have more choices and there's more competition for the right tenant."

Interviews with business owners demonstrate that many are keenly interested in commercial real estate and looking for ways to maximize their investment. But interestingly, it's clear that many have had to figure out real estate through trial and error, often with scant advice. So we've come up with a series of questions about office space that any business owner should ask, and then answered them -- feeling that this once-in-a-decade market is an opportunity no entrepreneur can afford to miss.

I'm signing a lease. What's negotiable?

Landlords are fanatical about maintaining rent levels these days, but they're willing to dole out all other kinds of concessions, from reduced security deposits to snazzy Aeron chairs. In fact, a little cottage industry is springing up to provide party favors to tenants simply for signing a new lease. In Philadelphia, where the vacancy rate stands at 17.5%, a start-up called Turnkey Office Solution Systems contracts with landlords to put together a package of benefits to attract new tenants to their buildings. Services include budgeting, designing floor plans, installing IT networks, hooking up phones, buying new furniture and equipment (and selling the old stuff), and even moving itself. Tenant improvement allowances are also becoming more generous. They are paid either as a percentage of the total lease or a certain amount per square foot of space. In addition, entrepreneurs we talked to routinely asked for and received moving expenses, parking rights, and free signage.

Also, keep in mind that until you've literally signed the lease, you can keep negotiating. Edward Chaney of Sunchain, a tanning chain franchiser in Scottsdale, Ariz., has negotiated nine leases for his stores. He says the bulk of his negotiations happened after the terms had been set and he'd received a draft of the landlord's standard lease agreement, which always favors the landlord. (Some experts jokingly refer to this as the "landlord's wish list.") Chaney goes through all of the legal verbiage in the agreement, then counters the landlord's overreaching by trying to negotiate more generous financial concessions. For instance, if the contract basically says, "We can evict you at any time for any reason," he'd change the language to say, "No, you may not evict me at any time."

Landlords usually come back and say, "Can you ease off this a bit? How about six months' notice?" Chaney might reply by saying something like: "Gee, I'm putting so much money into renovating this space, and I don't want to be out all of that money if I'm evicted. But six months' notice would be okay if you give me more tenant improvement allowances." They almost always bite.

Do I have to guarantee the lease personally?

Not necessarily. Todd Palmer, founder of Diversified Staffing Services in Farmington, Mich., had no trouble getting his landlord to waive a personal guarantee when he recently moved (he also asked for, and received, four months of free rent). Landlords often ask for personal guarantees from start-ups, service businesses, and companies in volatile industries. However, if you are a credit-rated tenant with a history of growth and have three years of audited financials, liquid assets, strong cash flow, and little debt, you should be able to avoid them. Otherwise, a better option to a full personal guarantee is a so-called good guy guarantee, in which the guarantor is held personally responsible only until the tenant leaves the building -- even if that's before the lease is up.