Commercial leases can range in length from a day to a hundred years, and anywhere in between. That being said, most leases fall within a standard range depending on the property type, local market, and specific desires of the tenant and landlord.
While it’s not at all unusual to be outside of these ranges, initial lease terms are often 3-5 years for office space, 3-7 years for retail space, and 3-7 years for industrial space.
All else being equal, these situations are usually associated with longer-term leases:
- Single-tenant buildings
- Newer properties (particularly “build to suit” developments)
- Significant buildout package provided by landlord
- Significant rent abatement provided by landlord
- Large anchor spaces (specific to retail)
- Ground leased properties (e.g. pad sites)
And these situations are often associated with shorter-term leases:
- Multi-tenant buildings
- Older, less desirable properties
- Minimal concessions (TI allowance or rent abatement)
- Smaller inline spaces (specific to retail)
Usually, landlords want longer terms while tenants prefer shorter terms with options to renew providing flexibility.
Within a singular shopping center, the tenants’ lease terms can vary considerably. For example, a fairly standard tenant mix could include a pop-up shop on a 14-day lease, a standard inline tenant on a 5-year lease, a grocery anchor on a 10-year lease, and an outparcel fast food restaurant on a 20-year ground lease.
Why do landlords typically prefer long-term leases?
Landlords typically prefer that tenants sign long-term leases so that they can lock in predictable cash flow far into the future.
Importantly, when a property is encumbered by long-term leases, potential investors view the asset as a safer investment and apply a lower capitalization rate (cap rate) to the in-place cash flow, resulting in a higher property value.
In rare circumstances, landlords will prefer a short-term lease. For example, if you’re considered a “risky” non-credit tenant, or you’ve negotiated a below market rental rate, the landlord may want the ability to re-lease the space to an alternate tenant in the not too distant future and therefore may prefer a short-term lease.
What should you consider when deciding on the term?
As a tenant, it goes without saying that you want to consider the stability of your business and your level of confidence in terms of how long the location will suit your needs. It’s also important to evaluate any necessary concessions, such as rent abatements or tenant improvements, as these factors directly impact the minimum term required by the landlord.
If you commit to a longer lease term, you’ll likely have more power to negotiate better concessions, or possibly even a better rental rate. The greater the buildout costs for the landlord (whether they complete the buildout or provide a TI allowance), the longer the term will need to be in order for the landlord to recoup their investment.
Additionally, if you require your space to be built out by the landlord, it’s an easier sell if your specifications would be desirable to alternate tenants in case you ultimately need to vacate. It’s much easier for the landlord to stomach the risk of investing in your space if they know they can re-lease the improved space with relative ease, covering their downside.
If you require a highly specialized buildout and want the landlord to foot the bill, you need to be an excellent credit tenant (think: Amazon, Walmart) and be prepared to commit to a long-term lease (likely 7-10 years or more).