Short-Term Vs. Long-Term Leases – a CRE Pro Perspective

 April 21, 2020

By  Guy Gray

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.

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About the author 

Guy Gray

Guy Gray serves as Chief Operating Officer overseeing our technology and client services teams. He is responsible for guiding Quarem application development, networking and security, as well as new client implementations.

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