The information age has increased the velocity of change exponentially. Think about it: most businesses now build a two-year strategic plan – best case. And most can only project revenue one year out because business owners don’t know how their businesses are going to evolve. Take Instagram. It started as a small app that allowed its users to “check in” at various locations so their friends could find them. The founders of that tiny little start-up had no idea that the photos incidental to that service would make their business explode into one of the biggest businesses in Silicon Valley.
What do these evolving businesses need most when they are looking for office space? Flexibility of term and flexibility to grow or shrink in size.
Now think about real estate. Most landlords buy buildings with financing made available to them only because those loans are secured by long term leases with credit-worthy tenants (not the Instagrams of the future). Today, however, even creditworthy Fortune 500 companies have difficulty predicting their futures with any certainty. Did you know that the average lifespan of an S&P 500 company has decreased from 67 years in the 1920’s to 15 years today? What happened to Kodak? Radio Shack?
So how do we reconcile the needs of many of today’s businesses with the requirements of owners and mortgage lenders on commercial office buildings? It seems like the answer to this question might be a compromise on behalf of both landlords and tenants.
Tenant Compromise
Growing companies searching for office space need to understand that the more money they ask the landlord to put into building out their space, the harder the deal is for the landlord. If, however, a tenant takes space “as is”, the landlord does not have to come up with any capital upfront. Less deal costs and less risk. So, if the tenant fails and defaults on its lease, the landlord has significantly reduced its exposure. The same goes for a tenant that needs to relocate because of growth-fueled expansion requirements
On the other hand, if a tenant asks a landlord to build out large numbers of private offices and use high end finishes, the landlord is going to require a longer term length over which to amortize the costs of those improvements. A landlord is also going to want some security for its investment and most young companies cannot offer that.
Landlord Compromise
Landlords could provide very open floorplan space with open ceilings and perhaps one enclosed room per 1500 square feet for use as conference or huddle space. If tenants embrace an open floorplan, the electrical and HVAC ducting do not have to be reconfigured every time a new tenant occupies the space. Because the landlord’s investment is low, his exposure is low. The landlords are more able to agree to shorter term leases that allow tenants the flexibility they need to grow.
Landlords should also recognize the fact that many young start-up companies eventually become their full-floor tenants. Jeremy Moss of Silverstein Properties shared an anecdote about his experience as a landlord. Silverstein converted half a floor at 7 World Trade Center to a flex “incubator” space which would house small tenants for short terms. It was very successful for them. One tenant from that initial space is now a two-floor tenant in the building. And, Silverstein went on to convert another entire floor to this incubator concept.
In summary, if tenants embrace a more open plan and customize their space with furniture and décor which they own and which can be easily relocated as their needs evolve, landlords should be able to provide greater term flexibility in exchange for the lower build out costs.
