Is it possible to find a Short-term Lease?
Three years is the usual minimum for a standard commercial lease term, which for some businesses is nearly three years too long. Small businesses and start-ups need flexibility--shorter lease terms and very few strings--in order to establish themselves in the market. They don't take up much space, either, which means that they are looking for a little bit of office space in a market where rentable space often starts at 1,000 square feet.
When these companies go shopping for a small space with short, string-less leases, however, they don't find much. Landlords happen to prefer longer term leases for a stable rent base, and may be unwilling to rent month-to-month or to sign a 12 month lease, for example. In a soft market, it is possible to negotiate flexible terms, but companies will need to expend significant time and energy to find willing landlords.
There is more bad news for companies looking for short-term space in the conventional office space market. Company XYZ finds 500 square feet of space in a building that suits its needs, with a landlord willing to lease it for a twelve month term. But when Company XYZ enters into lease negotiations with the landlord, it has no leverage to seek valuable concessions like tenant improvement allowances. In addition, XYZ's rental rate will likely be higher than its neighbors that occupy more space, and it is vulnerable to a rent spike after 12 months if the company renews.
It isn't impossible to find smaller office space and negotiate flexible leases, and a good broker can help streamline the process. But there are options away from looking in the conventional commercial market: pop-up retail stores, executive suites, and subleases are all available to businesses that are seeking flexibility.
What is a Pop-up?
This temporary retail trend is so named because stores "pop up" in retail space one day, and then clear out a few days, weeks, or months later. Christmas and Halloween stores are the quintessential pop-up retailer. Start-up designers, mobile art exhibits, small businesses that want to test the market, and online stores that need an occasional brick-and-mortar presence are all excellent candidates for pop-up retail spaces. Even well-known retailers take advantage of these short leasing options for their designers, or for new products.
Pop-ups feature very flexible terms, with length of lease agreement as short as one day or as long as one year, with month-to-month availability sometimes following. Rental rates are significantly lower with pop-ups than in ordinary commercial leases, sometimes as much as 50% lower. Pop-ups are good for landlords, too, since some rent is better than no rent, and bustling space that attracts customers is always superior to an empty storefront.
Pop-up opportunities can be found at online sites such as popupinsider and storefront.
Retailers have pop-ups for easy in, easy out space; office workers have executive suites. These are fully equipped and usually customizable office space with extremely flexible terms. Not only do these spaces have the latest technology, but they also have receptionists, telephone operators, IT, and office managers. Common areas and conference rooms are shared.
Flexibility is the name of the game with executive suites--businesses can have as little or as much space as they need. Terms can be one week to a year or more, perfectly flexible to suit the customer. One flat rental fee is charged, without insurance, maintenance, or other pass through expenses. Best of all, there is almost immediate occupancy with no set-up necessary.
Executive suites do have drawbacks. Rental rates are significantly more expensive than conventional office space, as they include so many services and assume all of the occupancy risk. As space is shared with many other tenants, conflicts can arise between them.
Close cousins of executive suites include limited services offices and no service business centers, variations on the full-service office theme. Virtual office space is another variation, providing a prestigious address, a professional telephone operator, and occasional use of an office or conference room for a company owner who works from home. Co-working space is a bit of a different animal, with its creatively decorated office areas and collaborative philosophy of sharing space.
Subleasing is an excellent option for companies seeking flexible lease terms. A sublease can mean taking over an office space from the sub-lessor as he or she vacates it prior to the expiration of the lease, but it most often means leasing shared office space from the sub-lessor. We will address the latter definition only.
Pros for sublease space
- Easy on the wallet--sublease space tends to be 10% to 50% cheaper than the ordinary rental rate. Rent is a flat fee, without pass through expenses that ordinary leases contain.
- Flexible space--there are plenty of smaller office space options suitable for smaller companies
- Turnkey--build-outs and upgrades often already in place. Furniture is sometimes available to purchase at a discount or use free of charge.
- Shared spaces--sub-lessees often enjoy access to reception, break rooms, conference rooms, storage, etc. as part of their rent
- Shared equipment--access to fax and copy machines can often be negotiated, saving the sub-lessee the expense of purchasing expensive equipment.
- First right of occupancy--often sub-lessees have the first option to occupy space vacated by the sub-lessor when the original lease is up.
- Collaboration--Companies that sublease space from similar businesses can benefit from networking, client referrals, and the companionship of just talking shop.
Tenants who sublease space should be alert, however, to potential problems.
Cons for sublease space
- Breach of lease--If the sub-lessor defaults on the lease, the sub-lessee could incur costs and damages if they have to leave the space due to the default.
- Subject to original lease-- The sub-lessee is subject to both the terms of his or her sublease as well as to the original lease. Before signing anything, the business owner should thoroughly understand both leases, perhaps with the help of a real estate attorney and/or a broker.
- What you see is what you get--Subleased space is usually presented as-is; there are few options to modify the space to suit the needs of the tenant.
- Too many layers of communication--The sub-lessee has to address problems of maintenance or repairs with the sub-lessor rather than with management; this extra layer of communication could cause costly delays for the business.
One further caution for companies looking to sublease is that they do their homework on the sub-lessor's business and work environment. An ideal match would be to find a sub-lessor with a similar brand or image, similar work styles, and compatible ethics.
Businesses should approach sub-leasing space with the same energy and dedication as they would in a traditional leasing situation. They should shop around thoroughly, completely understand the terms of both the sublease and the original lease, and should include provisions in the sublease to protect them in the event of a sub-lessor default.
Several flexible options exist for small businesses, start-ups, and other companies needing short-term leases. The prudent company will evaluate all options against both potential gains and the bottom line, and enjoy the flexibility that comes with fewer lease strings attached.
Guest Writer for 42Floors