Flex or Long-Term? How To Determine What's Best for Your Firm

Calculating office space used to be mathematical. Now, it’s philosophical.

The search for office space has changed drastically in just the past few years. Businesses aren’t starved for options when searching for office space. On the contrary, they are faced with increasing complexity in their decisions, such as determining how much space they need and whether they should seek a direct office lease or a more flexible, short-term solution.

That philosophical shift arrives as more companies adapt to remote work and most employees come into the office only a few days a week. For these businesses, some sort of flexible, short-term arrangement is making more sense than a traditional office lease.

“That is the holy grail for corporate occupiers: Pay for the space I need when I need it, and don't pay for it when I don't,” said Rick Bertasi, chief executive of Newmark Group’s Global Corporate Services and a longtime real estate executive who spent 10 years in London. “If you're paying for space for seven days a week for all these people, and they're only coming in two [days], that's a lot of idle space you're paying for.”

London’s legacy office market has always been steered toward long-term leases, which in turn created opportunities for competing landlords to offer more flexible alternatives well before the pandemic. Coworking pioneers such as Regus (now IWG) have helped turn London into a mature hub for flex office space.

But there are still benefits to hanging one’s hat, so to speak, on more permanent office space.

Here are some questions office tenants should ask when considering whether to sign a traditional office lease or pursue a short-term arrangement.

For companies with just a handful of employees, paying a premium for short-term coworking space could be a better investment. But there are some key questions to consider:

• Do the values of the coworking environment and provider match those of your company?
• How conservative are your clients, and how often will they visit?
• What will your company look like in a few years?

If you don’t know the answer to the last question, a flexible coworking environment may be the right choice. However, if you have a clear vision and growth plan for the foreseeable future, an office lease may be the answer.

Flexibility is key here. Coworking tenants can decide month-to-month or year-to-year what type of workspace best suits their needs. Going this route also helps prevent upfront fees, deposits and the long-term contractual obligations of a lease.

Want to move in now? Need a place that’s pet-friendly or has a gym? Different coworking options offer a wide range of amenities. When you don't have to worry about furniture or supplies, work can be the sole focus.

Other costs like office equipment maintenance, utility bills or a cleaning service, are usually covered by the coworking operator, or the office landlord offering coworking arrangements.

Coworking spaces also often host lunch workshops and other networking events designed to connect potential clients and investors.

More traditional landlords are moving into coworking as well. Newmark, for example, offers Optality, an app that manages and books flexible workplaces on demand. Newmark and other traditional real estate firms like CBRE have also acquired stakes in coworking startups such as Knotel and Industrious (respectively).

“So when companies say, ‘I'm going to need 50 seats,’ I respond, ‘ok, great. How many days do you actually use 50 seats?” Bertasi said. “And then by tracking the data in real-time, we can start to adjust what we're purchasing to what we're actually using.”

Though more coworking operators are offering office suites, privacy may be a concern when sharing space with other short-term tenants.

Costs can easily add up as a company expands, too. Once you hire more than a few employees, traditional office leasing may be the better deal.

“Once you get past [a] 30 to 40 headcount, it makes sense to [sign a long-term lease],” Bertasi said. “If you have uncertainty or variability in your actual demand, you pay the premium of a flex space because you can change the quantum more easily. And if you have a high degree of certainty … then you want to be direct because you get the cost savings.”

Signing a lease is a serious commitment for any business. Besides tying a company to a location for years to come, there are often upfront investments in furnishings, office equipment and renovations to consider.

But owners get their logo on the door and custom decor that echoes their brand. Permission to throw a party, host visitors for an event or adjust the thermostat is not required.

Now is a good time for tenants to be searching for traditional office space. The national office vacancy rate in the U.K. stood at a six-year high of 6.9% in August, according to CoStar research. Additionally, the 31 million square feet of speculative office space under construction should push the national office vacancy rate higher.

Concessions such as free rent are on the rise as more landlords scramble to fill space. Since the peak of the pandemic, rent rate declines have leveled off, but rent growth rates were subdued at 0.2%, according to CoStar research.

When considering whether to sign a direct office lease or go the coworking route, the answer may seem simple: it depends on costs and the size of your company.

But other factors such as flexibility to change locations, the costs and complexities of building out an office, and whether a business can share office space with neighboring companies must be considered.

At the same time, the glut of vacant office space presents new opportunities for growing companies to secure stable space.

Ultimately, Bertasi said three factors will attract workers to any workplace: a short commute, food and beverage offerings and wellbeing [or how companies demonstrate their care for individual employees]. Employers have three goals to consider as well when looking at office space: establishing company culture, mentoring and training, and ensuring people are productive.

So what does that mean when searching for office space?

“We’re certainly advising companies not to rush, take the time, test some things,” Bertasi said. “Because unless something is dramatically amiss at the moment, [companies] don't need to rush and get it wrong. It’s far better to move slowly and get it right.”