F is for…

Office Lease Flexibility

I am shocked at how often I’m hearing this word. It is part of most conversations with tenants these days. I understand where it is coming from, but its frequency is what is shocking to me. The word? Flexibility.

It’s being driven by an inability to forecast how people will work coming out the other side of this pandemic. For some insight, watch my interview of the week with regarded workplace strategist, David Stella, here. When you combine questions about how we work, with a lack of visibility regarding business growth, you have tenants wanting as much flexibility as they can possibly get. So, let us consider all the ways to achieve this in the current market.

1. The Flexible Office Market

To be clear, there are no shortage of options. Near Grand Central in Midtown alone, you have over 30+ providers. The biggest risk in this part of the market is what I call counterparty risk. Will the company you choose be in business, and will they continue to operate in the location you select? The last thing you want to do is move into a new spot, make all the necessary changes to your website and business card regarding physical address, and then be told they are closing. It happens more often than you think, which is why it’s important to select carefully.

Remember what happened to Breather, Knotel, Regus, and WeWork? There are some major positives to this part of the market, namely a physical presence without a long-term commitment. Sprinkle in amenities like access to touchdown space in other cities, terraces, social programming, freebies like coffee and breakfast, and you can understand why it is a real option.

By the way, I have a whole part of my business dedicated to the flexible office market. My partner, OfficeNetworks, has been able to leverage the market for the most competitive pricing (after 20+ years of them doing it, this gets them some street cred!), as they aggregate over 20,000 locations in 125 countries.

2. Subleasing

Free furniture, short term leases, minimal setup, zero construction costs, and rents deeply discounted, compared to face rents for direct space in a building, make this a great option.

3. Flexibility in the lease

It is crucial to prepare for tomorrow as best you can. When looking at office space, it is not just about what you need now, but about what you will need in the future. It is important for your business to ask several questions:

  • What are you planning for your company’s growth?
  • What does the headcount look like in 2 years, 5 years?
  • What are some things that could change in your business in the next 12, 24, 36 months that may change your space requirements?
  • Are we taking enough space to consider future growth?

There are lots of solutions for the answers that come from this. So, let us dig in to what you may need in your lease, to prepare.

Ask for the right to desk share

While you wait for your business to grow, and to offset real estate expenses, make sure to negotiate desk sharing rights. It enables you to have affiliated companies use some of your space without needing the approval of the landlord. This is generally required when subleasing, and we know from my other blog that it can take a long time, and doesn’t always result in a sub-tenant.

Negotiate appropriate subleasing rights

Even though we have addressed this in other blogs, it’s crucial to stress this point. Negotiating subleasing rights is crucial to flexibility. First, you need to make sure you have the right to sublease your space. Then, you need to have the right to hire your own representation to sublease your space. Do not agree to leave it to the landlord’s agent. If they have vacant space, are they more motivated to sublease your space, or lease their own space? Exactly! Their space. And finally, you need to negotiate a shorter period of landlord’s consent, ideally 30 days. If it is any longer, it is likely a tenant who needs space immediately and won’t agree to sublease your space, for fear that the approval period may be somewhat drawn out, leaving them in a pickle if by some chance consent is not received.

Ask for the right of first offer

Sometimes called a ROFO, it is a negotiated term that offers the opportunity to grow. It obligates the landlord to give you the first chance to lease additional space. You will have a clearly defined period to make an offer before it expires. The landlord has the right to say yay or nay. If they say nay, it can be leased to whomever, without any restrictions.

Ask for the right of first refusal

Sometimes called a ROFR, it is also a term that helps a tenant who may be growing in the future. This is more favorable to the tenant and more difficult to achieve in a negotiation. It obligates the landlord to give you a chance to match an offer that they have received. So, it is a great protection and defensive play to allow you to consider the other space that you have specifically identified as interesting to you, before the landlord leases it to someone else.

Ask for a renewal option

Maybe you plan to say the exact same size and you want to minimize potential business disruptions. Maybe you have put a lot of money into your space, and you want to protect that investment, or maybe there is a large tenant in the building who will be acquiring more space in the future. It does not cost you anything to ask for the right to renew. It is a very tenant-friendly right but, depending on your business and the landlord’s situation, there is the chance you can achieve this in your negotiations.

Ask for the right to cancel

Maybe your business needs have changed, and you no longer need as big of an office. Or, maybe the market will change considerably, and rents will be much less in the future. Having the right to cancel is empowering, as it offers optionality.

Your real estate advisor’s job is to expect the unexpected and to protect you. Remember how you can use the F word as you think about your own real estate in the future.

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