Today we will talk about a strategy used by companies that are thinking about ways to alter their real estate obligations based upon a change in the market or a change in their own business. To start with the term “blend and extend” refers to an extension of an existing lease for your office space, an early renewal.
As an example, let’s say your current lease has 2 years left and you are paying $60 per square foot. This strategy would allow you to renew for an additional number of years, thus “extending” the term of your lease. If leasing rates had gone down to say $50 per square foot, signing this extension would allow you to “blend” your lease rental rates so that you have an average rental rate lower than you are currently paying. It would also perhaps enable you to capitalize on concessions that may be available like free rent and a tenant improvement allowance from your landlord. You may even be able to apply some of those free things now rather than wait for your current lease to expire. In summary, you are happy in principle with your current location and open to exploring how to secure it for longer if the terms work for you and your company.
Why implement the blend and extend strategy?
1. Take advantage of a favorable market situation
While “Blend and extend” is not a new term, it has grown in popularity over the last 30 years. The concept of extending the lease term for your office space has its roots in the mid-1990s when office rents fell, and companies had to cut their costs. It has also gained popularity in recent years, due to the same forces that sunk office rents. In the current environment as vacancy rates have crept up and pricing has fallen it’s provided the opportunity for tenants to reduce the per square foot rent.
2. Reduce or increase how much space a tenant is using
Blend & extend can be a very useful strategy when a company is increasing or decreasing its footprint. In other words, if they need more space or less space, it’s an opportunity to come to an agreement with the landlord on terms that work for both parties.
3. Helps secure the location for the long term
Imagine if you had spent hundreds of thousands or millions of dollars on the construction and buildout of your operations. In many instances, your commercial real estate is critical to your operations whether office, manufacturing, distribution, medical to name a few. There would be nothing worse than having to relocate and reinvest in the interior of your space. In a “hot market” where prices are moving higher and the indications that this will continue, the blend and extend strategy helps you secure your real estate and remove the concern about the future.
What’s in it for the landlord?
Landlords are in the business of filling their space with tenants who pay their rent. Especially in uncertain times there are many landlords who are willing to consider opportunities to maintain their current tenancy and therefore increase the visibility of their future rent roll and cash flow. This cash flow is a key component that will contribute to future opportunities to refinance and perhaps the sale of the building at some point. Additionally, it offers an opportunity to secure a tenant that may in a few years consider relocation creating the risk of future capex for the landlord in the form of a new buildout for a new tenant as well as transaction costs like free rent and the risk inherent in a new tenant they haven’t had experience with in the past.
“Blend and extend” is not a new term, but it has grown in popularity over the last few years. The concept of extending the lease term has its roots in the mid-1990s when office rents fell, and vital companies had to cut their costs. It has also gained popularity in recent years, due to the same forces that sunk office rents. While this method of negotiating leases isn’t new, it has gained in popularity during the recession. It usually takes the form of an amendment but can also result in ripping up the current lease and having a whole new lease written.
When negotiating an office lease, it is best to consult with a commercial real estate broker before committing to a blend and extend the agreement or any other agreement. As you can see this strategy has the opportunity for a win-win situation for both tenants and landlords, offering potentially reduced costs and greater certainty for cash flow.
As always please feel free to reach out with questions.