This piece is a collaboration between Dany Koe and Drew Levine of the Colliers | Atlanta Office Services Group. From site selection to lease negotiations to post-transaction strategies, Dany and Drew serve as trusted partners for our clients throughout Metro Atlanta and around the globe.
There are more options today than there has ever been for office occupiers, and that’s not always a good thing. It can be overwhelming to try to figure out which option is best for your company’s success. Should you embrace the entrepreneurial atmosphere of a coworking space? Should you opt for the flexibility of a sublease space? Or should you cut costs and go for the cheaper long-term option of a direct lease? If you’re reading this article, we don’t need to tell you that the answer is not a simple one. If it was, you wouldn’t be here. So, let’s jump right into it and break down the pros and cons of each option and which work best for which types of office occupiers.
Coworking Office Space
Coworking space is all the craze right now and according to our very own Scott Amoson, Vice President of Research, it’s not only here to stay, but is expected to increase going forward. Coworking is a collaborative work environment that involves a shared workplace. Many coworking options offer varying levels of privacy and collaboration. Members can rent access to common areas, single desks, private offices and even team spaces.
While you may initially associate it with casual, jean-wearing techies or creatives the coworking sub-sector is much more robust than that. Of course, WeWork is the top-of-mind giant typically associated with the more relaxed demographic but other companies are challenging the coworking status quo such as Serendipity Labs, Industrious and Spaces all who are offering options for the more professional office occupiers. So, is coworking right for you? Here are some pros and cons to consider:
Flexible Lease Terms
Coworking space offers occupiers the most flexible option for lease terms. For instance, WeWork offers month-to-month lease options terminable anytime; however, companies can find economies of scale by signing for one year or more. For ambitious start-ups, flexible lease terms are attractive because it means you can focus on growing your company without having to worry about the constraints of a 5-year direct lease. Not only are the lease terms flexible, but they’re relatively straight forward. Some aren’t even leases at all, but memberships similar to what you’d sign up for at LA Fitness.
Low Start Up Costs
When coworking started around 10 years ago, it was targeted towards start-ups and freelancers because it cut start-up costs typically associated with traditional office real estate. Coworking spaces are plug-n-play, meaning show up with your laptop and you’re ready to go, you don’t have to spend hundreds of thousands on furniture or improvements. This is especially important to start-ups who typically don’t have the credit to negotiate hefty tenant improvement allowances in direct leases.
While coworking started as a solution for start-ups and freelancers, it now attracts some of the world’s top companies like Microsoft, Verizon and IBM. The networking opportunities in coworking space allows for these tech giants to access talent, innovation and investment opportunities. For smaller companies, it can provide the opportunity for collaboration and synergy among members.
While the initial start-up costs for coworking space is attractive, don’t let that fool you. As you scale your business, the long-term costs can be exponential. Those costs can eventually become growth prohibitive. We have seen some companies in leading coworking spaces spending as much as three times the rental amount per square foot compared to direct space. Take for instance a recent client of ours who spent more than $35,000 a month for a coworking space prior to signing a direct lease.
Lack of Personal Space
Probably the most obvious downside to coworking is the actual co-working. Many of our clients who have moved from coworking space felt that it lacked privacy and confidentiality. Even in private offices and team spaces, professional privacy can be an issue when surrounded by the characteristic glass walls found in typical coworking. As you could imagine, it’s also fairly noisy as hundreds of independent businesses are operating in an open space simultaneously. Lack of personal space also throws a wrench in a company’s ability to define and express its own culture and identity.
Who is Coworking Best For?
- Start-ups and freelancers: Coworking can be the perfect solution for start-ups and freelancers who could benefit from the minimal start-up costs, networking opportunities and flexible lease terms.
- Tech/Creative companies: For tech companies who are looking to access talent and innovation, coworking could be an excellent innovation strategy.
Sublease Office Space
Sublease space comes about when a tenant with an active lease has unused space prior to the termination of the lease agreement. To recover some, or all, of the costs associated with that unused space, the tenant places it on the market as a sublease opportunity. Subleases are still considered traditional lease transactions and require comprehensive documents to outline the responsibilities and obligations of the subtenant, sublessor and landlord. Subleasing provides some unique benefits and can be a viable option to office occupiers. What are some of the pros and cons of subleasing and is it right for your company?
Subleases are typically a cost-efficient solution for growing companies. The savings are two-fold and can be recognized in both capital and operating expenses. For instance, many subleases come with next-to-new furniture and plug-n-play capabilities — reducing the need for initial startup capital. From an operating perspective, sublease rents can be up to 50% less than market rates. Not only are subleases cheaper, they can also provide subtenants with more room to grow their business because often the spaces being subleased are larger than the current requirements of the subtenant.
One myth about subleasing is that it’s not a flexible option when compared to coworking, but many times a good real estate advisor can work with you to identify or negotiate short-term sublease opportunities. We’ve been able to negotiate one-year termination clauses into three-year subleases as well as securing subleases as short as 12 months. On a different flexibility spectrum, subtenants can typically make minor design changes such as painting, furniture and signage to better reflect their company’s culture and brand and they can often move in to the space within several days.
Whether the sublease space is vacant or occupied the original tenant still has an obligation to the landlord, so from a landlord’s perspective, there’s no financial benefit to offering the typical perks that accompany direct leases like free rent or compensation to design and construct the space. There is also the risk of losing a sublease space even after occupying it if the sublessor defaults on the original lease.
Supply of sublease space is typically very low in any given market. For example, in Q3 2018, the supply of sublease space in the Atlanta market made up just 0.8% of the total office market. With such a small percentage of available space it can be difficult for office occupiers to find a sublease space that works for their needs.
Who is Subleasing Best For?
- Companies in growth mode: Sublease space is an excellent opportunity for young, growing companies to expand their operations, workforce and create their own identity.
- Companies new to an area: Companies who are expanding and are new to a geographic area can benefit from the flexibility of sublease space.
Direct leases are the most common type of lease transactions and include a comprehensive leasing agreement. This agreement outlines the mutual responsibilities between the owner of the property and the occupier. Because they are the most common, rental rates for direct leases typically define the market they’re in. For instance, in Atlanta in Q3 2018, that rate was $25.75 per square foot of office space. Direct lease rates are highly flexible among a metro area’s districts. Take for instance Atlanta’s Midtown and Buckhead districts whose Class A spaces range from $45 to $50 per square foot while the Cumberland, Central Perimeter and Downtown markets hover between $25 and $35 per square foot.
While direct leases are the most common, they aren’t always the best option for everyone. Here’s what you need to know about direct leases:
Best Long-Term Strategy
In terms of cost, direct leases are the best long-term strategy for a company with steady, definable growth. With good representation, tenants in direct leases can negotiate reduced market rents, compensation for construction (tenant improvement allowances), and even months-worth of free rent. Tenants can also negotiate lease options such as early terminations and expansion options to mitigate risks.
No other lease option offers the freedom to develop your company culture as well as a direct lease does. Tenants in direct space can custom design a space to fit their budget, culture and style of work. As mentioned above, landlords typically provide an allowance for tenants to improve the space to their desires with minimal limitations. Many direct leases also offer signage options ranging from standard monument signage to premium building signage.
In a sublease situation, the subtenant is at the mercy of a sublessor’s financial responsibility to the landlord. If the sublessor doesn’t pay, the subtenant could be out of luck. In a direct lease, the tenant has full control over their fate in their space.
High Startup Cost
Direct leases require high initial startup costs which usually include a direct deposit, furniture, cabling and any construction costs in excess of the tenant improvement allowance provided by the landlord. This requires tenants to have initial startup capital that can be difficult to acquire for young companies.
While both coworking and subleasing have relatively flexible lease terms, direct leasing is the opposite. Although some landlords are realizing the competition from coworking and offering more flexible terms, traditionally direct leases require lengthy lease terms to reap the cost benefits mentioned above. Not only that, but direct leases are typically a long, drawn-out process that can take months to finalize.
Who is Direct Leasing Best For?
- Companies with predictable growth: Companies who can map out their growth trajectory over the long-term would benefit from the cheaper long-term costs of a direct lease
- Companies strengthening their brand: Companies who want to strengthen their brand and corporate culture should consider direct leases for the freedoms they provide
- Companies with good credit: Companies with good credit are attractive to landlords because of the low risk involved. These companies can typically negotiate the best perks and can also easily acquire the initial capital required
How to Decide
We’ve discussed just some of the factors that will affect your decision, but there are many more nuances and circumstances that will play a role in determining the right strategy for your company. The right choice will be just as unique as your company’s culture, goals and strategies. For that reason, regardless of where your next move is it’s important to start early and to understand how the unique features that differentiate your company will also determine the best decision.