Short- or Long-Term Commercial Real Estate Leases: What`s Best for You?

When it comes to starting your own business, one of the first things you’ll have to do is secure a lease, whether that’s for an office space, a warehouse, or a storefront. No two leases are created equal, and there are a lot of individual factors to consider: location, cost, the size of the building… the list goes on and on, but one of the most important factors is the duration of the lease. Is a short-term or long-term lease best for your business?

Unfortunately, there’s no one-size-fits-all answer for that question. Every company has different needs, and both short- and long-term leases have their own pros and cons. Here’s what you should consider:

Flexibility vs. Security

Short-term leases will give you the most flexibility. If your company grows more quickly than you anticipate and you need a bigger space, or if you find that your current location isn’t ideal in some way, you’ll be able to relocate at the end of your lease. On the other hand, you may decide that your current location is perfect for your business - but if you’re on a short-term lease, you might not be able to renew when the original lease is up. Your landlord may decide to pursue a different business model with his property, sell it, or sign a more advantageous lease with another company.

In a long-term lease, you know that you’ll be able to use the space for a number of years - however long your lease is. The downside to this is that if your business outgrows your space, you may have to pay a significant amount of money to leave the lease early or be stuck in an ill-fitting building until the end of the lease term.

Quick Start vs. Bargaining Power

How fast do you need to secure space for your business so you can get to work?

Short-term leases are usually a lot less complex than long-term ones, so the process is likely to move much more quickly.

Long-term leases are most landlords’ preference, so if you’re ready to commit to one, you’ll find that you have more bargaining power. The negotiations may take longer - both parties want to be completely sure it’s a good deal since it’ll last for several years - but you’ll probably be able to get your landlord to agree to a lower monthly rent payment and more flexible lease terms.

Availability and Current Trends

Another factor that you’ll have to consider is whether or not the ideal lease is even available. Landlords prefer long-term leases, so you’re more likely to find those… and with the future even more uncertain than usual due to the COVID-19 pandemic, short-term leases are in higher demand.

On one hand, short-term opportunities may not stay on the market long before someone signs the lease. On the other hand, the increasing demand is forcing many landlords to offer short-term leases when they might not have been willing to a few years ago. Overall, current trends point to shorter, more flexible leases becoming more prevalent, and break options are becoming more common in even long-term leases.

Planning for the Future

How long have you been in business? Sadly, most new businesses fail within the first 1-2 years.

If you’re in a short-term lease, you’ll have some peace of mind knowing that you can cut your losses if your business fails. On the other hand, it’s difficult to budget if you think you might be moving to a new location after a year - not only could the rent on your next location change drastically from your current rate, you’ll also have to factor in the cost of moving your entire operation from one place to another.

If your business fails and you’re in a long-term lease, you could lose your source of income and still be on the hook for several years’ rent. With a long-term lease, you’ll have a real hassle on your hands if your plans or needs change - but if your company is stable, it’s good to know exactly what you’ll be dealing with over the next few years.

There’s no simple answer when it comes to deciding whether a short-term or long-term lease is right for your business. It depends on where your business is currently, and where you expect it to go over the next few years.

Consider what you need the most right now: flexibility, or security? Do you need to move into a space quickly, or do you have time to negotiate the perfect long-term lease? Are you running a fledgling business with an uncertain future, or is it an established business with a predictable rate of growth? Long- and short-term leases both have their pluses and minuses, but if you keep all of this in mind, you’ll be able to make the right decision.

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