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The Effects of COVID-19 on Your Premises Lease -- Vol #5

To Stay or Leave?

Tough Decision When You’re Not Sure What Way Is Up

Society has changed in many ways over the past few years in response to digital communication and the pandemic. Some changes are temporary, other changes are permanent. Consumer buying habits have changed with a significant shift to on-line marketing and purchasing at the expense of direct retail shopping, resulting in less physical shopping activity and less demand for retail rental premises. Companies are finding it’s unfeasible to reach previous staffing levels with reduced sales volumes and electronic commerce resulting in reduced employment opportunities.

Sales are weak and customer traffic is low due to physical-distancing requirements.University residences, health centres,entertainment centres, airlines, resorts and sit down restaurants are empty.

Staff have learned to work at home and no longer travel to workplaces during the day resulting in displaced demands for day-time services. Schools are unsure whether physical classes will resume any time soon; families are deciding who should leave their job and stay at home with children. Many people have decided not to return to the work force; the numbers will not show up in unemployment figures; their lack of disposable income will reflect in the overall economy.

We all agree that the business environment has changed significantly. The question is how to position your business in the current and future environment. In the short and long term, will your revenue volume decrease due to societal changes making your rent and other costs too high? What timeline should be considered to see if the changes are significant,permanent, or can be adjusted to?

Now is the time to consider relocating to manage your premises location to position your operation to move ahead. Now is the time to consider whether you should stay or leave. Now is the time when significant retail premises are coming on the market.

On one hand,

❖ Your customers know where you are now,and are familiar with your location
❖ Your current landlord might be willing to negotiate lower rents and better tenancy terms and conditions given the new conditions
❖ It’s expensive to move in terms of time,emotional energy and money
❖ You may like your landlord because he is good to work with, runs the building well, and attempts to form a partnership in making my tenancy positive
❖ Breaking your existing lease could be costly

On the other hand,

❖ If you do not leave, you will be left behind.Your premises were chosen, and lease terms and conditions negotiated at a very different time.
❖ Due to the changes, there may be more suitable trade areas for your business; even moving 1 km in one direction or another may result in a very significant sales increase.You will improve your top line if you move closer to a stronger client demographic.
❖ There may be one or more suitable alternate locations for your business; for example,moving from hidden office to front row centre retail space which was not available even a few months ago will result in a very significant sales increase
❖ The realty market has now shifted to become more tenant friendly which will result in better lease terms and conditions. If your lease is impaired with an early termination clause,now is the time to relocate to leased premises without an early termination provision which provision eliminates the ability to finance or sell without offsetting for leasehold improvement cost

There are many reasons to stay or leave and every business will think about it differently.How do you manage the thought process?

There is power in numbers.

First, the economic metrics of your tenancy arrangement are simple to quantify and manage. If the tenancy cost in your current location is greater than the rent plus “amortized cost to relocate” to another location, and your sales at the new location will be equal to or greater than your current sales, then it makes sense to leave. For example, if you are paying rent of $100,000 per year and your lease contains an early termination provision impairing the value of your operation by the$300,000 cost to relocate, why would you not relocate to better space, in a better client demographic if the rent plus amortized cost to relocate is less, and You can quantify this equation:

Stay and pay over 10 years 10 X$100,000 + $300,000 = $1,300,000
Leave and pay over 10 years 10 X$75,000 + $300,000 = $1,050,000.

The answer is clear. Leave.

Second, demographic analysis takes the guesswork out of what will happen if you move from where you are now, to where you could be.Demographic analysis gives you the power to compare the customer data from your current trade area with the same data gathered from alternate areas enabling you to understand the effect of relocation on your existing customer base and predict new customer flow. Having this study in hand provides a context to compare relocation to a new trade area to remaining in your existing trade area before you begin your search for new space. You can quantify this equation:

Stay 40,000 households spending $450 per year for oral healthcare divided by 24 clinics = $750,000 per clinic

Leave 55,000 households spending $550 per year for oral healthcare divided by 22 clinics = $3,375,000 per clinic

The answer is clear. Leave.

Whether you stay or leave, demographic analysis will also help you adjust your services to be more appropriate to your existing trade area population.

It’s time to look at options and to recalibrate your business model in the context of the new environment.

Realty Lease Consultants invites you to have a free consult on your leasing issues, we can help make sense of it all. Experience the difference experience makes.
Realty Lease Consultants has over 75 years combined leasing experience and founded by Ian D.Toms over 25 years ago. We are leasing experts and provide these services:
- Offer to Lease,
- Lease Negotiations
- Lease Term Renewals/Extensions
- Lease Assignments with Amendments
- Lease Review and Consult
- Demographics and Site Selection
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Realty Lease Consultants

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