Uncertain Economy Causes Shorter Term Leases

The Dallas Morning News ran a story this past Friday titled Uncertain About Future, Companies Signing Shorter Term Leases. The article indicated that the uncertainty in the economy is causing many businesses to sign-up for shorter lease terms. Clearly, without some indication of our economy's direction, business owners are indicating an unwillingness to make commitments for office or industrial space that will burden them with over capacity, and cost, if the economy continues to sag; or place them in an undesirable position if the economy begins to flourish from a combination of factors including government stimulus funds.

Small-privately held businesses in particular are the most influenced by economic uncertainty and have the most to lose if they are incorrect in their prediction of the economy's direction. My firm, Carmen Commercial Real Estate, is based in Indianapolis and works with these firms every day because the majority of businesses that lease Indianapolis office space are privately held small and mid-market businesses.

As I've stated in many of my posts during the past 9 months, the slow down in the U.S. economy and the related "credit crisis" has created a tenant's market whereas landlords are offering any viable tenant significant incentives to enter into a lease agreement for office or warehouse space. Ironically, it's just this type of market that a tenant should sign-up for as much lease term as possible in order to capitalize on the lease incentives and low rental rates prevalent in the market for as long as possible. In theory, it would allow the business owner or manager to capitalize on the soft market for as long a period as possible.

But the statistics aren't following the theory. Businesses continue to try to enter into shorter agreements, whether on new space or with extensions of existing leases. Essentially, they're willing to take a pass on gaining the long-term benefits (lower lease costs) of extended lease terms in favor of minimizing the risk (lack of lease flexibility) associated with longer term leases. Indirectly, this may be a commentary on just how volatile business owners and managers view the current economy.