Short or Long Term Leases…Which Make More Sense In The Current Economic Climate?

Uncertainty about the economy, about business and sales, about the real estate market, all suggest that companies should enter into short-term leases as a means of protecting their ability to remain flexible.  For some companies, short-term leases are the right approach.   However, when seeking to renegotiate leases as a means of extracting liquidity and mitigating risk, short-term extensions offer little value to landlords.  Consequently, in those instances, short-term leases would similarly provide little value to tenants.

Like the Phoenix rising from the ashes, uncertainty and chaos breed opportunity.  The greatest elements of wealth are often created in down markets.  Those who carefully plan, are prepared to take action, and then execute intelligently, tend to achieve beneficial outcomes while others scramble to survive.

Given the extreme lack of demand for leased office space in most U.S. commercial real estate markets, landlords are keenly interested in attracting tenants, and retaining those they already have.  With the right advanced planning, most landlords can be inspired to structure creative transactions that permit them to capture new tenant leases and restructure existing leases, thereby increasing the occupancy and cash flow in their buildings, while supporting the business and flexibility needs of those tenants.

Remember that everything has a cost.  The benefit to a tenant of a short-term lease strategy is the flexibility that results from not being bound to a lease term beyond a particular horizon.  Flexibility can be extremely valuable in business, but costly.  The price?  With short-term leases, it can often be difficult for tenants to secure low occupancy costs.

When prices are low in any commodity, the smart money stocks up and buys more for future use.  That’s true in commercial real estate, too.  By executing longer term leases, tenants create their own benefits, while providing landlords with the fuel they need to accomplish their financial objectives.  With longer term leases, landlords can, in turn, provide benefits to tenants that make such transactions profitable for both parties. 

So, what’s the cost of a longer term transaction, where a company would likely achieve lower occupancy costs?  In a traditional long-term lease, that cost might include less flexibility.  Most companies don’t really need the complete and total flexibility they seek, and usually end up overpaying for the privilege.  

Which makes more sense…long or short-term leases?   There is not one correct answer.  It really depends on the needs of both tenant and landlord.  Advanced and intelligent business planning and a keen understanding of commercial real estate markets, as well as, knowledge about the unique challenges faced by commercial landlords, is the best approach for companies asking themselves whether short or long-term leases make more sense in this challenging economic climate.

What do you think?

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2 Responses to “Short or Long Term Leases…Which Make More Sense In The Current Economic Climate?”


  1. 1 Matt February 25, 2010 at 6:31 am

    Each situation is unique but overall I think it is beneficial for a tenant to secure a long-term lease in a depressed market. As you discuss above, a long-term lease equates to greater concessions and a lower effective rental rate over the life of the lease. The tenant can essentially use the long-term lease as a “hedge” against higher rental rates when the market rebounds. It is a win-win situation for both parties, the tenant realizes the positive P&L impact and the landlord benefits from the steady cash flow and occupancy.

    A great example is a recent lease renewal. The tenant had 8 months left on a 5-year lease so as you can imagine the rental rate was sigificantly above current market rates. The tenant negotiated a 68-month deal and the landlord immediately reduced the rental rate by $.45/sf and included 4 months free rent. In year 6, the rate is still much below the current rate. It is now guaranteed that as the tenant’s revenues (key assumption) rebound, their occupancy costs will remain low, which will result in greater profits. I am not sure a short-term lease would have yielded better results.

    • 2 realstrat February 25, 2010 at 3:51 pm

      Well, said. However, in instances where tenants are heading toward exit strategies or when they cannot yet project their future with reasonable certainty, the flexibility afforded under short term leases or a leases that can be terminated early, might provide sufficient trade-oofs and be just enough to foster timely decision making.

      Thanks for writing in. I look forward to your future comments.


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THIS WORK IS DESIGNED TO PROVIDE PRACTICAL AND USEFUL INFORMATION ON THE SUBJECT MATTER COVERED AND REPRESENTS THE OPINION OF THE AUTHOR. HOWEVER, IT IS PROVIDED WITH THE UNDERSTANDING THAT THE AUTHOR IS NOT ENGAGED IN RENDERING LEGAL, FINANCIAL, ACCOUNTING, OR OTHER PROFESSIONAL ADVICE TO THE READER. IF LEGAL, FINANCIAL, ACCOUNTING, OR OTHER PROFESSIONAL ADVICE IS REQUIRED, THE SERVICES OF A COMPETENT PROFESSIONAL SHOULD BE SOUGHT. THE AUTHOR SPECIFICALLY AND EXPRESSLY DISCLAIMS ANY LIABILITY THAT MAY BE INCURRED AS A RESULT OF THE USE OR APPLICATION OF THE INFORMATION THAT IS CONTAINED IN THIS WORK.

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