This post is by Arman Tabatabai from Venture Capital – TechCrunch
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It’s a cautionary tale we hear far too often: Company A, hiring staff and growing rapidly, finalized a 10-year lease for office space. One week after move-in they had filled their space to the brim, with engineers sitting on top of sales staff, interns working in the hallways and the CEO operating out of a small conference room.
Company A had backed themselves into a corner, in desperate need for more room with no easy solution to the problem, and looking to swiftly dispose of their inadequate space.
In the startup environment, everything moves at a breakneck pace. Raising venture capital, hiring staff, assembling a board, etc. – all while working day-in and day-out to refine a product or service meant to disrupt the world. With senior staff pulled in different directions, there is little time for a strategic analysis of office space needs.
My team at Colliers specializes in
with technology companies at all stages, from pre-seed to IPO and beyond. We have advised dozens of companies literally from their first day of operations, to others whose market caps are well into the multi-billion dollar range.
We have developed some metrics and strategies that help our clients to grow without having to worry about scheduling an hourly team huddle at the downstairs Starbucks.
We have extensive experience working with companies with offices around the U.S. and world, but a majority of our work is in the New York City area. The analytics and strategy formation for each company is different dependent on a multitude of factors: budget, concrete or tentative headcount projections, timing, etc. – but there are a few baseline rules that can help jumpstart the education process and conversation.
From working with hundreds of technology companies in various states of flux (capital infusion, rapid growth, headcount reduction), we’ve become experts on which office may be the best fit for a company, from a month-to-month WeWork licensing agreement to a long-term lease.
Rarely in the commercial real estate world are issues black-and-white; and strategies are unique to each company. But there are several basic questions that need to be answered when evaluating office space:
- When is co-working an effective solution? What are the pros and cons?
- What about a Sublease? When is that appropriate?
- When is it time to make a long-term commitment to traditional office space?
When is co-working an effective solution? What are the pros and cons?
Standard co-working spaces (WeWork is the leading example) can be a great solution for an emerging company, but there is a downside: co-working is, on both headcount and unit (per square foot) basis, more expensive than a traditional office. However, its advantage is that it affords a company flexibility to grow without being locked into a long-term lease.
Also, companies have been using flexible workspaces with great success for employees working remotely; whether it’s a group of skilled engineers in a satellite city, or an inception point to test the market in advance of significant hiring.
Qualitatively, developing a culture and brand identity is almost impossible in a co-working space, and the laid-back, sometimes loud atmosphere is not the most conducive environment to keep your head down and work on growing your business. You also get less ‘bang for your buck’ paying per-head, with employees working in extremely close quarters with less dedicated space than a traditional office.
However, the flexibility of a co-working licensing agreement carries much less risk than a standard office lease, which can counterbalance the steep upcharges.
We’ve found that standard co-working is most effective when a company has fewer than 30 people on staff. Once headcount projections are forecast beyond that, it becomes less and less cost-effective to go the co-working route.
- Significant flexibility of term (months-years)
- Little lead time to secure space
- Ability to upsize/downsize as needed
- Little or no security deposit
- No capital expenditures (i.e. furniture, build-out costs)
- Significant premium on rent per square foot (2x-3x direct space rent)
- Extra payments for certain auxiliary services and “extras” (e.g. conference room reservations)
- Space must be taken “as-is” in both size and layout
- May be difficult to recruit top-tier talent to “temp” space
- Not the most professional setting for board/investor presentations
However, the space is evolving, with players like WeWork and Knotel expanding their models beyond shared-space into the “Enterprise Model”.
These offices are branded as your own corporate headquarters in the same mode as a traditional office space and they are not cohabitated by other companies. This twist on co-working offers less flexibility than a standard WeWork agreement, requiring a modest term commitment (via a licensing agreement) averaging about 1-2 years in length.
This could be an attractive solution for companies with unconfirmed headcount growth projections or those requiring space for a finite amount of time for a defined project. But that flexibility comes at a cost, sometimes as much as 40% greater than a traditional office space.
The providers control and facilitate much of the upkeep (electric bills, coffee, snacks, etc.) which allows the business to focus on more vital tasks. But sometimes that control is missed, with greater difficulty fixing immediate issues in the space, like HVAC problems (brrrrr) and magnetic card-key issues.
What about a sublease? When is that appropriate?
Subleases (built space previously occupied by another company) are often a “step-up” from co-working space. You don’t have full control of the build-out and culture, but you have your own self-contained unit of space. There’s no chance of someone from another company taking an hour-long call on AirPods outside your office.
If you have a set of wants and needs, a sublease generally fulfills more of the needs than the wants and could be a good semi-permanent solution as your company evolves. These spaces are also taken at market prices without the upcharges inherent in a co-working space. Companies typically receive some concessions (generally a few months of free rent) from the Sublandlord as an incentive.
- Your own space, more professional appearance and more conducive to good board/investor meetings
- Rent is less than a traditional direct lease and the term is fixed
- Modest concessions (mainly free rent) provided
- Modest ability to customize/brand your space
- Shorter term lease provides modest flexibility
- Effective “overflow” space when immediate expansion occurs
- May be able to stay on a direct Landlord basis after lease expires
- No growth/contraction options
- Longer lead time to occupancy (3-6 months)
- No control over the build-out process
- Some security deposit required
- May have to re-enter the market in a short timeframe to locate the next space
- Sublandlord and over-Landlord approval required, with 30-60 day waiting period prior to finalization.
When is it time to make a long-term commitment to traditional office space?
Once year-over-year headcount projections are defined, it’s an appropriate time to begin a full analysis of long-term needs, inclusive of budgetary restrictions, brand identity, specialty alterations (i.e., stadium seating, showers, fish tanks, etc).
When you’re ready for a long-term home you’re ready to consider a traditional “direct” office lease. The process includes analyzing the possible options in your entire building rather than just one space so that you can anticipate and plan for long-term growth for your company.
While a long-term commitment comes inherently with additional risk, there is also more to gain in significant concessions from the Landlord as an incentive, in the form of a free rent period and tenant improvement allowance money to decrease out-of-pocket capital expenditure needed to build and brand your space.
- Ability to custom build your space to suit your business needs
- Direct relationship with Landlord (no “middle man”)
- Additional incentives from the Landlord in exchange for a long-term commitment (i.e. free rent period and tenant improvement allowance)
- Opportunity for seamless growth within building and other building in Landlord’s portfolio
- Much longer lead time (8 months to 2 years and beyond for larger leases)
- Some additional out of pocket required for build-out costs
- Long term commitment of (at least) 5 years
- Long-term financial liability on the books
- If there is a shift in the business (good or bad) subleasing space is costly and sometimes difficult
- Some out-of-pocket funds may be required for build out
- Much longer lead time needed (8-18 months, depending on space size and complexity).
Flexibility is essential for a growing company, where headcount can fluctuate quarter to quarter, teams can be relocated to satellite offices and venture capital infusions can foster immediate explosive growth. Co-working can be an answer, as we have seen. The space is evolving, with some companies maturing with WeWork from standard co-working to the enterprise model and staying within their portfolio for years.
Each solution –co-working, sublease and traditional office–should be weighed equally during the decision-making process, and companies need to know to ask the right questions to make an informed decision.