monday, 7 october, 2019

Commercial real estate is changing more rapidly than ever before - and we have to modernize with it.

  • Flexibility and overall business strategy need to become the priority in leasing discussions, ahead of the outdated “price-per-square-foot” mindset.
  • More emphasis should be on long-term risk reduction, instead of a one-time base rent negotiation.

Commercial real estate is changing more rapidly than ever before. Since my first year of brokerage in 2003, I have watched the market shift dramatically, and have had to modernize with it. Previously, the industry vernacular was centered around terms like Base Rent, Rentable/Usable Square Feet, ROFR, and Sublease / Assignment. But even the best sublease clause did not eliminate the financial losses companies undertook during the 2008 recession when they found themselves needing to sublease their unused vacant office space at a ~50% discount. Everything has changed about the market – even the words we use to describe it.

This NYTimes article from 2009 assessed how tenants were managing their excess office space during the recession. The language used in this piece highlights the focus on traditional leases and the approach of traditional brokers at a time of significant market uncertainty. Comparatively, when considering the flexibility and short-term Space-as-a-Service options available in today’s market, the vocabulary has changed drastically. Flexible spaces allow tenants to avoid exposure to long-term risk going forward but understanding the language that is being used is critical to a successful outcome.

In 2019, both brokers and tenants must move on from terms like “Rentable Square Feet” and “Base Rent” and embrace more relevant metrics. Here are just a few terms you need to know when looking at CRE today:

Space-as-a-Service: Office space tailored to a client’s need

Some call it Flex, some call it Serviced, some call it Managed office space. Whatever the term used, it is referencing office space that is intended to work for the tenant, instead of the tenant working to tailor their needs to the office space. Leasing an office, regardless of the size, is now an outsourced responsibility.

With real estate being the second or third biggest expense to a company, more value should be expected from this product. C-Suite members should be spending their time on the company message, not searching for office space for months, discussing lease negotiations, picking furniture, installing and paying for IT wiring, thinking about receptionist, mail service, coffee and snacks, etc.

All these variables are improved upon through a Space-as-a-Service model, while also reducing the time spent by decision makers on these needs. SAAS approach to leasing lets you be in the space in a few days instead of 6-12 months. At Instant, we are helping small to major corporations, from 5 people to 1,000 employees, secure SAAS office space in a matter of weeks.

Term Flexibility: The ability to change course as needed without tremendous disruption

You may hear the jokes that a 20% premium above “Base Rent is not worth a free latte.” It’s an easy pun to make until the market becomes informed on the value of flex space.

Of course, referencing a latte undermines the value of short-term flexibility, cost savings on furniture and IT wiring, speed of occupancy, and additional services that come along with flexible office space.

Today’s companies operate in ways that require quick decisions especially in real estate where most companies are unable to predict headcount beyond 24 months. With today’s speed of business, a company can lose their biggest customer in a two-sentence email. Every company needs to be ready to adapt to unexpected changes, making flexibility crucial.

The premium for Space as a Service is a small price to pay when taking into account the reduction of long-term risk as well as all the benefits of today’s Space-as-a-Service approach to leasing. By eliminating the $45 per SF for furniture and IT wiring in the first year of a conventional lease, for example, it’s no longer probable to say the Space-as-a-Service model is more expensive. These initial leasing costs simply go away by using a flexible office provider.

Total Cost of Occupancy: The dollar value associated with all aspects of commercial leasing for a tenant, including but not limited to furniture, space and amenities

Negotiating a Base Rent from $80 to $78.50 psf in a lease negotiation is minuscule when compared to the losses undertaken by companies during the last recession. While each brokerage firm produced different and varying statistics, in Manhattan in particular, the market experienced a vacancy shift from approximately 5% to 20%. And nearly 50% of the available space came from tenants trying to dispose of their own unused office space. This second highest business expense at the time pushed many companies out of business.

With today’s modernized Space-as-a-Service / Flexible model available to companies, this sublease responsibility could now be avoidable all together. Brokers and tenants need to focus on flexibility goals and risk reduction.

Words Mean Action!

The largest companies in the world are actively dividing their global real estate portfolios in to two categories, traditional and flexible, and utilizing the appropriate specialist depending on the category. Today, Instant has worked with over 80% of the FTSE 100 and has specialized in the flexible market for over 20 years. Our goal is to provide clients with solutions that meet their company’s long- and short-term goals. This means we also partner with traditional brokers when clients are best serviced in traditional spaces.

Looking ahead to the looming recession, the real estate market cannot make the same mistakes we’ve seen in 2008. The availability of work as a service eliminates the risk of having to unload real estate as business deal with a faltering in the market. The benefits of work as a service go beyond luxury, fast growth, amenities, gyms, event space and high-end furniture. Learning our lessons from 10 years ago, companies now have an option to reduce their real estate risks and avoid the same issues we faced in the 2008 downturn. The language we use in real estate may seem relatively inconsequential, but it does, in fact, help us realize an entirely new approach and one that has a better outcome with greater value and lower risk for the client.

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