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Flexible Space and the Future of Occupancy in Commercial Real Estate

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THE STATUS QUO HAS CHANGED

Flexible space has been a hot topic in the commercial real estate industry for years. We’ve now seen a full cycle of boom/bust from “new twist” models like WeWork to older established models like Regus two or three times over since the early 2000’s. The ongoing pandemic (although things are improving rapidly now) has laid the groundwork for a more “flexible” future in how companies and occupiers think about signing leases and using space. There is a lot to wade through in terms of what the next phase of flexible space will look like but we decided to throw our two cents in the ring on what we expect and how Otso will become a vital amenity layer to these providers and owners as they grow in the future.

Before we dive too deeply into the future, let’s talk about the present. Without a doubt, Covid reset how many companies think about how they lease space and their employees interact with it. We’ve seen countless articles damning the future of office space from one side of the mouth while praising the leases that are getting signed with the other. It’s confusing. In reality, there has not been some fundamental shift away from occupying space as a business. Working from home (although in some cases convenient) is NOT a long-term solution for most organizations. We “tested in production” this past 12 months (to borrow a phrase from our software developers) meaning we got to really see what mass working from home looks like. So, what were the results?

Not catastrophic, but also not productive.

80% of businesses believe it is easier to manage employees, culture, and security from offices.

90% of employees want to return to the office at least 3 days a week.

That’s the whole enchilada folks. Businesses prefer offices and so do the employees, en masse. However, there is a wrinkle. Employees DO like the idea of working from “other” offices or locations/or spending at least one day a week at home. It should be said as well, big tech companies lead the charge on many of these trends but they are NOT the average user. Many businesses (especially SMB’s) only have a need for a single physical location, so these dreams of “working from Jackson’s hole and Miami” from week-to-week are not hugely realistic. 

That being said, with this test being lived by the majority of our world in the past year we can take some of these lessons to the bank on what will happen over the next five years.

FLEXIBLE SPACE IS HERE TO STAY

Broadly speaking, businesses are going to seek less “term” from their leases and opt for more flexibility. They might even pay more for it. As we’ve said before, broadly “getting the square footage right” matters more than the strike rate in a lease anyway. Maximizing occupancy sizes on a per-location basis could be a niche for flex providers to hit a home run.

On the leasing costs side, businesses clearly want to pay “less” but this has less to do with trends on work-from-home and more to do with liabilities.

Covid crushed a LOT of balance sheets.

Leasing is a huge cost to a business and having large spaces that go unoccupied in the event something like this happens again…is no bueno.

This crisis has brought foundational changes to the way companies think about space, at least for the ones who operate (and have the wherewithal) in multiple markets. Having less space, with flexible terms in which their employees can quickly be set up to work in is a future that makes sense for many of these growing organizations. This is the strength of flexible providers.

To be clear, we’re not talking about coworking and rental of a single desk or “seat” on a daily space. We’re discussing 2,000-5,000 S.F. leases, fully furnished, tech set up and ready to occupy but fully private and secured for the business leasing it. These will likely sit on 1-3 year terms (hugely more flexible than a traditional lease of 7-10 years) and provide many amenities to the business such as:

  • Accessible to the entire employee base, on-demand.
  • Printing, mail, even phone/reception all included/automated.
  • Tech/IT will “just work” from location to location
  • Privacy and security all in place, for any employee using the space.
  • Shorter Term! 

The benefits to a business can be great BUT they will pay extra for this flexibility, so working with their broker and the owners of these providers to provide the space that fits their needs is essential. For flex space operators, this means taking some of these flexible space offerings “in house”. We are already starting to see major players take 10-20% of their buildings and build out flexible offerings. They are hiring firms like Industrious and CommonDesk to manage these processes and spaces. So the future for flex space operators is less “sign a big full-floor lease with a co-working provider” and more “build it out on your own and hire a management company to handle it.”  It’s akin to adding a flag to a hotel, and there are many commonalities between hospitality and flexible space.

TURNKEY, ONE-PRICE LEASING IS ATTRACTIVE

One of the biggest advantages of flexible space is the idea of a turnkey, one-price lease. Predictable pricing (without the ebbs and flows of OPEX) can be helpful to a business even if the costs are significantly higher than a traditional lease. Make no mistake, businesses are PAYING for these flexible spaces (there is a reason they don’t quote you in a per square foot fashion). Yet, businesses are doing it more and more. 

Again, the rate matters far less to your bottom line than having a space that is only 50% utilized. Planning and being intentional about occupancy as a business has never been more important.

HOW OTSO WORKS IN FLEX LEASING

Ok, so how does Otso fit into this? Well, for starters here is what we do: Otso writes corporate guarantees on behalf of businesses in lieu of traditional deposits. We’re an option for Landlord and Tenant. We also help Landlords (or in this case flexible operators) assess financials much faster than traditional methods while allowing businesses more liquidity vs. locking up cash in a deposit or letter of credit. Now, let’s do some quick math and take a look at a “normal” flexible lease deal.

Let’s say a business wants to sign a one-year lease on office space for $5,000 per month.

In a typical deal, they will be required to put up a two-month cash deposit. That’s $10,000 locked up.

With Otso (assuming the business application is approved) that same business will be required to put up $0, and they’ll likely pay $50-60 more a month in rent for the flexibility to do so.  You can start to see how not paying a deposit can become a financial amenity layer to flexible space providers. Any Landlord who offers Otso is not only able to run financials (which most providers don’t do anyway) BUT they’re also able to offer a significant advantage in leasing….the option not to require a two-month deposit by the business.

BENEFITS TO FLEX OPERATORS

Beyond that, think of how most flexible operators capitalize their assets. It’s much more like a hotel than a commercial building. Meaning, occupancy rates (stabilization) are more important than the typical fundamentals of the term (time) and future rents. Since most deals are short, flex space operators don’t usually get the credit for the term of leases. They also get knocked on value for having little to no information about the underlying tenants.

With Otso, these operators get the benefits of having an enormous amount of relevant, useful information on the creditworthiness of Tenants PLUS they end up with more coverage against default. That has serious value for operators, beyond the amenity layer we discussed earlier. We’re talking about transformative change to the value of operations for each location here.

So, to sum it all up. Flexibility is a trend that isn’t going anywhere. However, it’s flexible AND private, secure AND convenient that will win for commercial real estate leasing. Imagine multiple, small locations in many markets of interest that any employee can travel to, work from, and get set up automagically…that’s where we are headed. For Tenants, it’s one price for a furnished, flexible, and tech-enabled space…with NO deposits 😉

It’s a single space (not a shared space) future in our humble opinion. In the meantime, Otso can revolutionize the underwriting, leasing, and valuation of flexible space operators on a per-location basis, permanently. Let’s add another layer of amenities to your locations today, contact us to get started.

 

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