Business Cycles vs Office Leases

Posted by Ashley Patterson On 3rd July 2014 In Corporate Property Strategy

The traditional office lease paradigm can be cruel when it comes to cyclical businesses; the vast amount of sublease space seen in recent years sits in testimony to this. When you are in need of additional space so is everyone else, when you have too much so too does the rest of the market. Being lock step in such a market means that the demand always works against you. A solution? Reduce your businesses exposure to the market by transferring some of the risk to those who are willing to take it on. This can be done by distinguishing between two types of space; the first, what we call “Core Space”, falls under the typical office lease albeit with a minimal requirement. The second type of space, Flexible or “On Demand”, is where companies cater for the peaks created by project work or cyclical work. This is particularly relevant to those involved in the resources or infrastructure sector at the moment. The idea is to minimise the risk of finding yourself with too much space by determining what is the Core demand and what is demand resulting from short term needs. By short term we are referring to anything below 2 years.

We minimise the amount of Core Space through the adoption of Activity Based Working (a potential 30% reduction compared with the standard open plan layout), outsourcing non-core functions, although this is a contentious subject, and finally maximising your employees mobile and home based work capabilities through technology.

On Demand space is that which is determined to be project or crisis driven, cyclical or mobile in nature. It is this space requirement where we attempt to transfer risk. We already know of organizations that are willing to take on our property risk. For the most part they are serviced office operators but increasingly we see building owners who are willing to incorporate shared space within their buildings as an incentive to prospective tenants.

If a user of corporate office space has a large enough requirement they are in a position where they can negotiate with serviced office operators to collocate with them or sway their decision in terms of locating nearby on the promise of an ongoing, if variable, requirement. Regus, the world’s largest serviced office operator, provides facilities in a number of public spaces, not just lobbies of buildings. Their decision on the location of new serviced offices has also been swayed by the locations and requirements of their larger clients.

The market for short term space is even online now with a number of apps marrying up the needs of corporates and business travellers with unused workstations and boardrooms. This market recognizes that many such facilities sit idle the majority of the time.

The driver behind these initiatives is, for the most part, financial. However we already know that the era of long-term leases is under threat from a younger generation of workers. If we can’t reasonably predict under a business plan what our space requirements will be in five years then this should be reflected in our appetite for traditional leased space.

Ashley Patterson
Patterson Property Consulting

© Ashley Patterson 2014