In the past, commercial real estate leases have generally been in the range of five to seven years in length. However, the rise of co-working over the past five years has greatly disrupted the space. Co-working spaces now provide companies with a more flexible option – allowing start-ups to rent office space by the month as they find their footing, or letting even more established companies to scale up offices quickly in new locations.
But what happens once those startups mature? What’s the next step when that major corporation has stabilized its workforce at the new location?
The answer: “flex-space.”
And in that answer lies great opportunity for the commercial real estate space. Although a move toward shorter leases may cause anxiety for some in the commercial real estate industry, taking advantage of this new trend toward “flex-space” can fill a gap in the workplace leasing model, while also opening up new revenue streams for commercial real estate owners.
What is Flex-Space?
Flex-space provides companies with access to flexible but dependable office space on a lease term of anywhere from one month to three years. These spaces are usually smaller suites grouped around shared facilities, such as conference rooms and kitchens. In contrast to co-working spaces, which are branded by the co-working company and are frequented by very small businesses and freelancers, flex space allows small to mid-size businesses to create their own office culture—even if they’re not ready or able to commit to a long-term office lease.
One of the most notable entrants into the flex-space market was when Boston Properties installed its first flex space at the Prudential Center in Boston last year. As one of the largest office landlords in the U.S., the company saw that small to medium-sized businesses were limited when it came to office solutions, and dedicated an entire floor of the large downtown property to the new flex space model. In the end, they leased all the suites within one month.
The new tenants were not just small to mid-sized businesses. In fact, several existing traditional tenants used the flex-space while their long-term office space was being built out. As you can see, the applications for this type of model are a selling point to a variety of different types of tenant.
Who Can Benefit From Flex-Space?
To take advantage of the growing need for flex-space, building owners need to carve out space within their existing properties, as the needs of the flex customer will require the ability to expand or contract easily. The physical space needs to be designed to allow all this to happen with minimal cost and construction time.
Given Boston Properties’ initial results, it would seem that the flex-space model definitely meets a need within the commercial real estate rental market. While shorter lease terms are beneficial for tenants, it also seems that offering more flexible lease terms can benefit CRE companies as well – especially those whose portfolios include older buildings that are having to compete with new product coming on the market. After all, the amenities a customer expects in an office building today have changed drastically to what was expected 10 to 20 years ago.
Flex-Space Requires a New Mindset
Building owners across the U.S. are developing solutions that allow them to capture the growing demand for flexible space. With the development of integrated technologies and changes in the market, the way in which building owners earn money has shifted, too. Some are developing their own co-working spaces. Others are committing a portion of their building to short lease terms to accommodate corporate customers seeking greater flexibility than a traditional office space. Many of these spaces are fully furnished and ready for immediate occupancy.
As a Sales Manager for CORT’s Commercial Business Development segment, I have personally worked on six projects already this year where property owners have targeted the flex-space customer. In each case, flexible lease terms were key for increasing tenancy. However, that flexibility also required more from third party providers.
For instance, shorter lease terms often require property managers to be more flexible in how they furnish these spaces. Buying office furniture for leases that range from one month to three years is no longer cost effective. This is where CORT’s Furniture-as-a-Service (FaaS) (http://www.cort.com/office-furniture-rental) has come in handy for several CRE companies pursuing a flex-space model.
Case 1: Flex Space Eases Transition for Current Tenants
One of the customers we worked with recently is the owner of a large downtown property in a prime location with over 1 million square feet. The property was built in the 1970s and is currently undergoing a multi-million dollar renovation. The update includes an exterior face-lift, and all the first floor lobbies are being remodeled, along with a complete overhaul of the basement floor food court.
Once the common spaces have been completed, as part of the building’s update, the owner has planned to create a flex space specifically intended for brokers. In the space, brokers will be able to speak with prospective clients, or work between appointments. Then, in the final phase of the project, the owner plans to create multiple fully furnished spaces that will be available for prospective clients to tour or lease short term.
Case 2: Flex-Space Attracts New Tenants During Renovations
Another client we are working with is redeveloping several city blocks right next to the heart of a bustling downtown area. During the 1970s and 80s, the area was a major entertainment draw, but over the last 20 years it has gradually fallen out of favor. As a result, it is now in need of a major redevelopment effort to restore its former glory.
To attract new tenants during the redevelopment process, the property owners are working with a developer to repurpose one of the existing buildings as a flex-space/co-working location. On one floor of the building, the building owner created common areas, much like any other co-working location. However, surrounding those common areas, there are 20 plus private offices, some as small as 500 square feet and some as large as 1,500 square feet. Each of those private offices will be available on anywhere from a 6 month to 3-year lease term, and each tenant will have access 24/7.
To ensure those suites were ready to rent, the building owner needed to make sure they were turnkey. This has helped create a revenue stream during the renovations, a time when expenditures can cut into even the most financially stable CRE company’s reserves. It will also bring in potential long term tenants that will be part of this space for years to come.
Flex-Space as a Modern Amenity
Another client owns multiple office buildings in a popular suburban location. While they are in a sought-after area, the buildings were constructed in the 1980s and now must compete with new construction that boasts more modern amenities.
The ownership made the decision to invest hundreds of thousands of dollars in order to create the amenities now expected in the marketplace. These include a large common area with soft seating, a gaming area with big-screen TVs, as well as a fully furnished training room. This space was designed to allow current tenants to host large gatherings.
But that’s not all. There was one more modern amenity the building ownership decided to make available to both current and prospective tenants – office space available on lease terms of three years or less. As such, they created five new fully furnished “flex-space” suites.
These suites also needed flexible furnishings, they are using our furniture-as-a-service program to ensure these new spaces can be quickly adapted to the needs of each new tenant. And as an added bonus to the owners, the FaaS program places the burden of changing the furniture on us and not the property owner, as we deliver, maintains and removes the furniture as needed.
Flex Toward the Future
Although the way people work is changing, the perspective of the landlord hasn’t. Receiving rent and retention from customers for as long as possible is and will remain a top priority. However, by servicing the growing demand for shorter lease terms and flexibility, landlords will be able to capture the tenants of today—and tomorrow.