October 22, 2019

Are You Ready to "Graduate" From Co-working?

Your big idea has grown and your company is growing bigger. You want to build a strong culture for your team and have your first “home” that fosters that culture. Your team needs a greater level of privacy and dedicated workspace for collaboration. With more employees, more clients, and more work...comes the real need for more space. Yet, you dread giving up the financial flexibility coworking spaces offer. 

Sound familiar? If so, it may be time for your team of 10 or more to graduate from working out of a coworking space and move-in to your first real office space. But, how much space does a growing company really need? And, for how long? And, most importantly how expensive will it really be?

Tenants in traditional office leases not only have to foot the bill for a 7-10-year lease, but also take on the added costs of office design, build-out, and furnishings. Those that wish to avoid the financial constraints of a traditional lease tend to stick it out at coworking options. Yet, it really can be difficult to understand and compare the costs associated with either option. Let’s explore the total cost of ownership for each option.

Traditionally Leased Office Space
$1,131 per employee, per month for 5-10 year commitment

A traditional lease for office space commonly yields a high total cost of ownership because the lease terms do not match the tenants needs. They often outgrow the space too quickly or underutilize the space they are paying for.

1) Finish Out
The tenant has to pay construction costs to build the space to the team’s specs. While the landlord will help cover some of these costs with a Tenant Improvement allowance, the tenant can easily be on the hook for $20 per square foot or more for more elaborate finish-outs. 

2) Design & Furnishings
The tenant has to hire designer and furniture vendors to bring the space to life. The cost = $20 per square foot.

3) Security Deposit
The tenant will pay for three to six months of rent up-front. The cost= $150,000.

4) Room for Future Growth (over-leasing)
On average, growing companies must lease 25% - 50% extra space to accommodate future growth plans. The cost =  33% of total rent.

5) Sub-leasing (outgrowing)
Half or more high-growth teams exceed their growth projections and end up needing to move to larger space before their term is up, incurring sizable subleasing expenses. The cost = 6% broker commissions + $3-5 per square foot recovery deficit + 3-6 months lost rent.

$1,313 per employee, per month for 6 month - 2 year commitment

1) Finish Out
Coworking operators pay to build-out and furnish spaces under their own 10-15 year leases, and then pass all of these costs along to their subtenants in the form of monthly fees. This results in a very high cost per square foot. The cost: $110-130 per square foot.

2) Flexibility Option
While not as punitive as long-term landlord leases, coworking operators usually charge a penalty if a tenant needs to move out before the end of the contract. The cost: 2-3 months of rent

3) Density
A key to making the numbers work for coworking operators is to maximize the revenue per square foot by increasing the number of employees in the space. Traditional office space has a density of 125-150 sf per employee where as coworking averages 80-90 sf per employee. The cost: 36% less space.

Agile Office Leasing
$1,065 per employee, per month for 1-3 year commitment

Recently, a third option for office space has entered the market that may make the most financial sense for teams of 10 to 200 employees. Agile office leasing offers the personalized, private workspace of a traditional office lease with the turnkey convenience of a coworking office - all at a cost lower that either option.

1) Finish Out
Agile office leasing providers partner with landlords to offer office spaces that are already built-out of offer quick minor modifications to tailor the space and make it move-in ready. The cost = $0.

2) Furnishings
You order exactly the furnishings you want for your office space and you can lease them for a flat monthly rate. The cost = $6-$7 per square foot.

3) Security Deposit
For qualifying tenants, financing options for the down payment which can cost $100,000 or more may exist, allowing tenants to preserve their growth capital. The cost = Typically less than $5,000 per month.

4) Security Deposit
For qualifying tenants, financing options for the down payment which can cost $100,000 or more may exist, allowing tenants to preserve their growth capital. The cost = Typically less than $5,000 per month.

5) Room for Growth (over-leasing)
Agile office leases are available for terms between one and three years, so tenants do not need to warehouse nearly as much space for future growth. The cost = 20%.

5) Sub-leasing (outgrowing)
Shorter-term commitments carry lower risks of outgrowing a space, but for many high-growth teams this is still a common occurrence. Tenants have the option of avoiding what can be a $100,000 expense with a flexible move insurance option. The cost = $3,000 per month.

Below is a quick-view table of the cost comparison per space.

There’s a well-known axiom in the real estate industry: “the most expensive real estate is space you don’t use.” Hands-down, the savviest business strategy to lease office space is to pay for it in shorter, incremental ‘chunks’ after you are certain about the size of your workforce. That means one to three years for most teams. Agile office leasing is better suited to the business models of today’s agile business.

Agile office leasing functions like AWS for office space. The result is a better experience for the entire team and at the lowest cost per employee.

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