In the minds of many commercial real estate professionals, the only ideal options for leases are long-term and… long-term. After all, who would want a short-term lease and all of the unpredictability that comes with it? Well, allow us to present a few reasons why both short-term and long-term leases are viable options to a commercial real estate professional.
Here’s a pros and cons look at the two, from the Tenant and Property Manager perspective.
Pros and Cons of Short-Term Leases
Let’s start off with short-term leases, since they seem to cause the most pushback among CRE pros. We understand that there are drawbacks to short-term leases (see cons below), but they do have their advantages. Here are some pros of short-term leases:
– Flexibility: For some tenants, the future is uncertain. Startups, for example, aren’t in the position to predict future growth or long-term space needs. A short-term lease gives these types of tenants’ flexibility that fits their needs.
– Easier to fill vacancies: For property managers, short-term leases are a great opportunity to keep space occupied that might otherwise sit vacant for too long. You can close a short-term deal a lot quicker than one for a long-term contract.
– Faster processes: It simply takes less time, negotiation and paperwork to process contracts for short-term leases than it does for long-term ones.
There are cons to short-term leases, however. Here are a few:
– Higher rates: Typically, short-term base rent is a lot higher than rent for a longer term. For Tenants, this could put a huge strain on their budget. For Property Managers, this could limit their Tenant pool.
– Risk: For Tenants, short-term leases don’t typically come with the same benefits as long-term leases, like renewal options. When you sign a short-term lease, you risk giving up a lot of your negotiation power, which could be an issue if you decide you want to renew.
– More marketing: For Property Managers, short-term leases could require more marketing work. While shorter terms are a good way to continuously fill vacant space, it takes a lot of time and effort to ensure you always have new tenants lined up.
Pros and Cons of Long-Term Leases
That brings us to long-term leases. Here are some of the advantages that come with long-term leases:
– Security: Having most of your spaces locked up with Tenants in long-term contracts can give you tremendous peace of mind and increase the financial stability of your portfolio.
– Predictability: Long-term leases also result in better forecasting and budgeting, for both Property Managers and Tenants. Both parties can better predict and prepare for the future.
– Tenant peace of mind: Longer terms typically come with more benefits. For Tenants, this means peace of mind knowing you have options down the road, like renewals or termination rights.
Cons of long-term leases:
– Lengthy negotiations: The longer the term, the more room both parties have for negotiations. The continuous back-and-forth is stressful and can get confusing.
– Less leverage: Property Owners might have to offer lower rent prices or more flexible terms in order to land a long-term lease. For that extra security and predictability in your portfolio, you’re going to have to give up something.
– Locked In: While a longer term lets Tenants settle in for a while, it’s not flexible when unforeseen changes pop up. During the negotiation process, Tenants heavily account for the future, but nobody has a crystal ball. Things change, like outgrowing the space, or the flipside, ending up with too much. Sure, you may have sublease and assignment rights you can lean on, but a lot of stress comes along with those options.
Whether you do short-term or long-term leases—your portfolio will likely have a mix of both—CRE software like Quarem can make them easier to handle. To see Quarem’s lease administration tools in action for yourself, request a demo today.