Today Landlords are facing a series of challenges that they have never faced before and that are also very dynamic.
The typical Landlord is not used to living in a world as dynamic as the one we are living today and this situation makes him very nervous because this Landlord is facing a situation not seen or experienced before.
The business world is moving to the flexible side and the Landlords are living in the rigid area for centuries. For instance; if you remember when Steve Jobs launched the iPhone back in 2007, the only way you could get one was by signing a contract with AT&T for 24 months. Just one carrier and a rigid contract. Nowadays, you can buy an iPhone with any carrier and on a month to month basis. So this is what the business is these days, more flexibility, more options, in almost all industries.
Landlords are not there yet. Looks like they will be, because they have other forces that don’t allow them to move that faster. This is critical for them to be aware of.
In these days where the occupancy rate for office spaces is decreasing and where companies are facing the big question …. What to do with my Real Estate now?
Since the start of the COVID-19 pandemic, office sublease space has increased by 39% according to Costar Group. The main drivers behind these office tenant downsizings are financial problems and/or a shift to work-from-home (WFH).
It could take years to absorb the current sublease inventory
The office market is going to be in disarray for the next few years as the real estate market recovers and companies figure out their approach to the workplace. Companies are considering taking advantage of these market conditions as the market shifts from one controlled by landlords to one controlled by tenants. If your company is in a position to make decisions about your future office space needs then now is a great time to negotiate with landlords.
Let me explain.
On one hand, we are seeing companies that are realizing that Work From Home turned out to be a solution to reduce their Real Estate size and this way reduce their expenses and face the ravages of the pandemic more intelligently. The challenge then, is to find out how they get rid of the contract or get out of the contract that they currently have either through a sublease or by paying a penalty or sharing that rent with someone who is compatible.
On the other hand, there are companies that are thinking that now they have to seriously change the layout of their office space, either to achieve healthy distance and hygiene and safety protocols or to redesign spaces that adapt to this new normal with more meetings via ZOOM and / or more open spaces.
Flexibility should be the premium amenity for office buildings and the solution.
Having been involved in refinancing buildings with Flexibility (Flex), underwriters seem to have embraced the logic of short term deals based on the premise that it’s better to have hundreds of members paying as compared to one tenant paying rent. And that is where Flex is very successful in refinancing.
Flex compliments office buildings as it provides more options and offerings for that asset. Not only does Flex offer Space-as-a-Service, it also compliments long term leases with traditional deals.
Imagine organic growth from Flex into other parts of the Building.
Currently, about 15% of our members move to traditional buildings when they grow and we have several big companies that have taken extra offices in our locations to supplement their traditional space.
Every Landlord should be considering Flex for their Buildings.
Landlords should stop thinking like 100 years ago, trying to find the solution inside their box. We are in the 21st Century talking about nanotechnology, AI, disruption among other new concepts, so they should be thinking outside the box. They need to focus on the revenue more than the old metric $/sft.
They need to include other services in their buildings, to think what to do with all that sft waste in big empty and gloomy lobbies and make their building more practical and easy to navigate.
According with our experience a new office building should include:
- Event Center
- Flex Space
- Executive Suites
- Conference Rooms
- Hybrid Model
- Have their own space but managed and operated by a 3rd party.
- Flexible Terms
- Traditional Model
For tenants, the balance of power has shifted in their favor. Limited office demand and leasing activity, coupled with rising sublease availability, have given tenants more bargaining power than they’ve had in years.
For Landlords, now is the time to explore other options, other models making their assets more flexible and friendly for the users.