Office space goes on-demand
Like everything else these days, on-demand services are big – and getting bigger. So, it’s no surprise that a concept that has revolutionized shopping, entertainment, and transportation is rapidly transforming the real estate industry. As companies respond to their employees’ needs for greater flexibility – including work from home options and flex hours – the conventional practices of negotiating long-term leases and providing employees with individual office spaces are quickly becoming obsolete.
On-demand or pay-for-use office space is a new reality for corporate real estate decision-makers. It has risen to the top of the consideration set for numerous companies assessing whether their current office space still fits their needs and what their office of the future should look like.
“Today, when we advise clients seeking new office space, the notion of on-demand or pay-for-use is often part of the strategic planning process,” says Rich Mirliss, managing member and consulting practice leader for CohnReznick Real Estate (CRRE). “Concepts like WeWork and Regus have redefined the way companies approach leasing and workspace planning for today’s mobile workforce.”
Aside from addressing the needs of employees who can now do their jobs outside and inside of the office, pay-for-use office space offers other significant advantages for companies:
The Financial Accounting Standards Board’s new ASC 842 accounting rules requiring lease values to be recorded on balance sheets is now in effect. However, if you commit to a short-term lease of 12 months or less, you do not need to include the lease value on your balance sheet. With less liability than a traditional lease, a short-term lease can improve a company’s debt and net worth ratios and, consequently, extend the company’s borrowing capacity.
For many companies, a merger or acquisition is key to their growth objectives. However, when combining operations post-merger, a company with a long-term lease can be saddled with square footage that does not meet the current or future needs of the newly combined entity, A pay-for-use lease eliminates the long-term commitment of a traditional lease, enabling the merging parties to use a wait-and-see approach in integrating their office facilities as they ramp up the newly combined company.
Expansion into a new geography generally requires the company to seek out new office space and sign a lease. But not all geographic expansions go as planned. By using a shared space or hoteling environment when entering a new geography, a company can test the waters of a new market presence without a significant capital commitment or long-term obligation.
The world economy is in flux, ranging from Brexit and political instability to trade wars and tariffs to continually changing international tax regulations. Companies employing a pay-for-use strategy in global markets are better positioned to navigate these risks. That’s because shorter-term leases or shared office spaces will minimize a company’s capital commitment and construction costs in international markets where political, economic, and tax-related uncertainty can be significant.
When evaluating whether a traditional lease, a pay-for-use approach, or something in between is right for your business, you should consider several factors. These can range from your need to stand out in the marketplace (e.g., having your name on the building to communicate the prestige required for your customers and prospects), the type of business you are in, the demographics of your recruiting targets, your office culture, and more.
“While pay-for-use is the right real estate strategy for many companies, especially startups and those expanding into new markets, it’s not a one size fits all,” says Steve Pavon, managing member of CRRE. “After working with companies to assess their short-term and long-term business and HR goals, we often find that a traditional lease, or even an outright building purchase, is the most financially viable option for them.”
Pavon and Mirliss advise companies to ask questions including the following as part of a strategic real estate assessment.
- What are your short-term and long-term growth objectives, and how can your real estate strategy best support them?
- What are your competitors doing? Will a new approach to providing office space to employees give you a competitive advantage?
- How do your employees work best? Do collaborative spaces best meet their needs, or is the privacy of individual spaces more appealing?
- Is your workforce fully mobile, or are there specific requirements within a physical location – such as privacy restrictions and the need to connect to on-premises technology – necessary for your employees to do their jobs?
- How long does your company plan to remain in its current location? Is relocation to another city or establishing offices in new locations part of your strategic plan?
- How might your company benefit from a state and local tax perspective if you significantly reduced your square footage through a shared workspace or hoteling policy?
- Are there tax incentive programs such as historic tax credits or opportunity zones that could make buying a building financially appealing for your company?
- Do you have space requirements for equipment, machinery, technology, or people that would be difficult to find in a pay-for-use situation?
- Would lowering your operating costs and increasing your flexibility make you more appealing for potential M&A activity?
Pay-for-use strategies are impacting all of us in our daily lives – from the way we can buy car insurance to how we can access cloud computing services. For any business assessing its corporate real estate strategy, a pay-for-use option should be in the mix due to the potential bottom-line benefits.
Case in point. CRRE recently advised a national law firm looking to open a new location. In assessing the upfront capital and long-term commitment required to enter a state they had never operated in, we strongly considered pay-for-use as a cost-effective solution. Although the law firm did not ultimately choose the approach because of multiple factors, considerations such as the thought process, quality of potential installations, speed to market, cost advantage, and short-term liability made pay-for-use an option we needed to thoroughly explore for this client.CohnReznick Real Estate LLC (CRRE) is a dedicated corporate real estate advisory group providing innovative solutions for both corporate occupiers and investors/owners. Our advisory services help clients alleviate operational pain points and create value by meeting current and long-term ﬁnancial, tax, accounting, and operational goals. By leveraging the breadth and depth of the CohnReznick platform, we provide a range of options that lead to educated decision-making and multiple opportunities.