Should I Sign a Long or Short Term Commercial Lease? (Pros/Cons)

January 21, 2022 Don Catalano Don Catalano

Where do you see yourself in ten years? Do you know? 

How about three years- or five?  

 

If you are looking to lease a new office space, you may likely be confronting some of those tricky questions. Well, maybe not how you’ll look or perform in the future- but how your company will.  

 

There are benefits and drawbacks to both long-and short-term needs. Your decision depends on what features your organization wants to prioritize.  

 

As tenant representatives, we have experience helping every industry determine what leases best fit their needs. Using our market intelligence as commercial real estate experts, we have identified the qualities that separate long- and short-term leases. 

 

By analyzing their pros and cons, you will understand how the length of your lease can influence your company's success.  

 

Long-Term Leases  

Long-term leases are highly variable. They can be anywhere from 5-7 years to 99 years. Your company's need for real estate in conjunction with the landlord's drive to fill space will decide your exact term. 

Pros of Long-Term Leases:  

Let's go through the perks you get from a long-term lease and how tenants like you can benefit from them. 

 

More Concessions 

Landlords are looking to sign tenants on long-term leases. Why? Finding and getting tenants accommodated within their properties is expensive. The process can also take quite a long time and is usually wracked with uncertainty.  

 

What Does This Mean for You?  

 

Landlords are usually willing to give you better terms if you are in their space for longer. Having tenants is a guaranteed cash flow. Any vacant spaces cost landlords monthly, so they want to be responsible for as few as possible.    

 

Having you on a long-term lease means that they don’t have to worry about marketing and renovating a space for 5, 10, or even more years!  

 

You have more leverage to negotiate on long-term leases. There is no shortage of possibilities of what this could mean. For example, you could start your lease with a period of free rent, receive a larger tenant improvement allowance, or seek out any other perks you want.  

 

Security  

With a long-term lease, your company is essentially laying down roots. As a result, you have stability in terms of financial consistency. Real estate is typically an organization’s second or third most substantial cost. Signing on to a clear, long-term lease will give you a reliable and accurate projection of future budgets. For such a significant cost, closing in on this uncertainty can allow your company to evolve by accurately assessing its best options.  

 

Cons of Long-Term Leases

Just like long-term leases have benefits, they also have drawbacks. Let's go through complications you may run into if you sign a short-term lease. 

Less Flexibility 

When you sign on for a lengthy lease, you should have a very clear projection of how you expect your company to perform long-term. If not, it could be an extremely risky move.  

 

You have less room to adapt to both internal and external influences. You are set within a specific geographic location of limited size. Any upgrading or downgrading must be considered around the existing commercial lease.  

 

You also lack the freedom to adapt to the marketplace. Some factors like disrupting events can not be foreseen. New technologies or events can come along and upset the existing systems on which your company operates. In this case, you could potentially be stuck with commercial space that no longer fits your organization's needs.  

 

Long leases are often associated with the risk of stagnancy. Being comfortable in one place for too long may take you out of the market. You may not know where there is room for you to get better terms, deals, or savings if you aren’t looking.  

 

Rent Escalations  

In every leasing agreement, there is an expected factor of rent escalations. Depending on your type of lease, the escalation rate will vary. However, for long leases- these additional payments can quickly add up. This means you could get caught paying elevated rental expenses even if the prices of neighboring properties plateau, decrease, or even plummet.   

 

Short-Term Leases  

Short-term leases are generally considered to be less than five years. The exact month or year amount of your term is determined by your organization's needs in conjunction with your landlord. 

 

Pros of Short-Term Leases: 

Short leases are associated with many benefits. Let's go through them.

 

Flexibility  

Leasing gives you the fluidity you need to adapt to the market. It’s as simple as that. If you are looking to prioritize adaptability, then short-term leases are for you. With short leases, the level of commitment required of your tenancy is extremely low. 

 

You are not tied to a specific geographic spot, landlord, or property. If your business is largely reliant on market fluctuations, it is better to opt for a short lease. It will give you the room you need to adjust to both internal and external performance indicators.  

 

You also have the flexibility to reassess your needs as your lease comes to an end. Most leases offer options to renew. So even if you go with a short lease, you still may have an opportunity to stay there for longer. You will have the time and space you need to make the best real estate decisions for your business.  

 

Easy In and Out 

The negotiation process for short-term leases is far less extensive than long-term lease arbitration. Naturally, there are fewer factors to pin down for quicker leases. Both parties attempt to predict their needs for the next ten or more years for longer leases. As you can imagine, it usually takes some time to agree to terms that satisfy the projections and safeguards of both the corporate tenant and landlord.  

 

If you are looking for less hassle in negotiation and a space ASAP, go with a short-term lease. You will most likely also be adding the luxury of a quick move-in. There is no real delay for the beginning of your tenancy.  

 

Cons of Short-Term Leases:  

Like anything, short-term leases are not perfect. Depending on your organization's needs, they may not be for you. Here's why. 

 

Landlords Prioritize Long-Term Tenants  

As discussed earlier, landlords are looking for long-standing, guaranteed sources of income. They will be more willing to bend over backward to land them in their space if they find them. If you are looking to start a short-term commercial lease, do not be surprised if they aren’t willing to offer you many concessions. Landlords are more inclined to open up negotiations to long-term tenants, so you may not be in a position to leverage your demands for a 1, 3, or 5-year lease.   

 

You will likely not receive as many perks for a shorter term like tenant improvement dollars, periods of free rent, extensive amenities, etc. As a result, you have less room to mold your corporate space to your company’s culture and needs.  

 

More Moving = More Stress  

Moving is right up there as one of life’s most stressful events, along with death and divorce. It takes a long time (and a lot of hassle) to move and become settled into a new corporate space. Shorter leases do not give you enough freedom to decompress and become comfortable in your working environment fully. This stands on a micro and macro level.  

 

Your employees may not feel as secure coming to work. In addition, their responsibilities may fluctuate during the moving process, affecting their usual obligations. On a macro level, the overall performance of your company could suffer. Uncertainty usually surrounds short leases. There is a less solid indication of future performance, and it may even be hard for your clients to follow where you are stationed if you frequently move.  

 

All said, companies looking for stability should stay away from short-term leases.  

 

Should I Sign a Short or Long-Term Lease?  

The answer is up to you. If you want to prioritize stability and room for personalization, go with long-term leases. Short-term leases are for you if you would rather give yourself some freedom to adapt to the marketplace. It all depends on the unique direction your organization is ready to take.  

 

However, if you still feel uncertain, tenant representatives are there to help you make a decision. They can assist you in balancing all the factors that require consideration to land you the most optimal property for your company’s needs.  

 

Looking to learn more about leasing space? Check out this article! 

 

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