‘Blend and extend’ leases to cut expenses, brokers say

TAMPA - With a continued softening of the real estate market and economy, executives are interested more than ever in cutting costs and improving their company’s efficiency. There is one method that is becoming more popular that allows them to do both.

Mia Jarrell and Matthew Heikkinen, brokers in the Office Group at Grubb & Ellis|Commercial Florida in Tampa, said the “blend and extend” trend is winning converts among savvy tenants - and their landlords as well.

“Blend and extend simply means renegotiating a tenant’s current lease - with their current cost-saving objectives - while extending the term of the lease,” Heikkinen said.

Also known as “recasting,” the strategy was not a viable alternative when occupancy rates were high and the economy appeared strong. Today, the landscape is different. Even tenants with more than one year left on their current leases are taking advantage.

“Most tenants and landlords see it as a win-win strategy today,” Jarrell stated.

Tenants win by significantly lowering lease costs. Such cost cuts can start the day the new lease takes effect. The difference between the original budget for space versus the renegotiated lease rate results in immediate savings with no money out of pocket from the tenant.

Heikkinen said smart tenants are also using the opportunity to rethink their space requirements.

“Tenants need to look at how they can optimize the space they are paying for,” Heikkinen said. “In today’s economy, using all of your space as efficiently as possible is paramount,” he stated.

Experienced brokers often work with architects and space planners and can utilize them to optimize a client’s space.

Commercial leases typically include annual escalations. As a lease nears the end of its term, monthly payments are at their highest. But smart negotiators are lowering rent payments by as much as 10% to 15% to create immediate and substantial savings for a tenant.

“An experienced broker can help a company achieve major savings in this market,” Jarrell said.

The “blend and extend” trend is catching on with landlords, too.

“Look at recent leasing trends in Florida,” Heikkinen said. “Vacancy rates are climbing and competition for tenants is fierce. We’re seeing rental rates drop in some areas. Landlords are open to the idea of negotiating a new ‘blend and extend’ lease now rather than face the prospect of losing a tenant and having to compete to fill the space vacated,” he said.

“For landlords, a good tenant with a long-term lease adds value to their assets,” Jarrell explained.