A five-year lease is the “gold standard” in commercial real estate, whereas residential leases usually run for only one year. This difference exists because office rentals operate on a completely different financial model.
Here is a breakdown of why landlords push for that 5-year commitment.
1. Recovery of Upfront Costs (Amortization)
This is the single biggest financial reason. When a landlord signs a new tenant, they often spend a significant amount of money upfront—long before they collect the first month’s rent. They need a 5-year term to earn that money back and turn a profit.
- Tenant Improvement (TI) Allowances: Landlords frequently provide an allowance to build out the space (walls, flooring, electrical) to fit your specific business needs. If they spend $50,000 renovating your office, they cannot recoup that investment in a 1 or 2-year lease.
- Broker Commissions: Landlords usually pay the real estate commissions for both their agent and your agent. This is calculated as a percentage of the total lease value and paid upfront.
The Math: If a landlord spends $20,000 on commissions and $30,000 on renovations to get you in the door, they are starting $50,000 in the hole. A 5-year term spreads this cost out, making the deal viable.
2. Property Valuation and Financing
Commercial buildings are valued differently than houses. A house is valued based on what similar houses sold for (comps). An office building is valued based on its income stream.
- Lender Requirements: Banks and lenders view short-term leases as “risky.” If a landlord wants to refinance their building or get a loan for repairs, the bank wants to see a “WALT” (Weighted Average Lease Term) that is long and stable.
- Asset Value: A building full of tenants with 5-year leases is worth significantly more to a potential buyer than a building full of tenants on month-to-month or 1-year deals.
3. Stability and Vacancy Risk
Turnover is the enemy of commercial real estate. When a residential tenant leaves, you paint the walls and find a new one in a month. When an office tenant leaves:
- The space may sit empty for 6–12 months.
- The layout might need to be completely demolished for the next user.
- Marketing costs are high.
A 5-year lease guarantees the landlord won’t have to face the expensive “vacancy cycle” for half a decade.
4. It Can Benefit the Tenant, Too
While it feels like a shackle, a 5-year lease offers you protection as well:
- Rent Certainty: You lock in your base rent. If the market explodes and rents double in two years (common in booming cities), your rent stays the same.
- Business Continuity: You don’t have to worry about being kicked out or having your lease non-renewed right as your business is hitting its stride.
Can you negotiate a shorter term?
Yes, but there is usually a trade-off. If you ask for a 3-year lease, the landlord will likely:
- Ask for a higher monthly rent per square foot (to hedge their risk).
- Refuse to pay for any renovations (you will have to lease the space “as-is”).
- Refuse to give any “free rent” periods.