AirOffice
For many companies, office space is among a variety of resources they make available to employees to help facilitate work. Other primary resources include technology. In fact, today, technology arguably contributes more to how work is done than the physical office. The diminished role of the office in facilitating work has resulted in changes in how companies look to use office space. One manifestation of this change is in flexible offices, or coworking spaces. This product segment, having grown considerably over the past decade, is tangible proof of shifting consumer sentiment.
As a product offering, office space is hard to create. It’s expensive to build, and, once built, it’s difficult to keep up with changes in demand. Developers must design the office product to best meet demand, such as it is, while simultaneously working within physical site constraints which limit scale and shape of the floor plate, among other things. Of course, cost is also a factor. The typical structure of the financial investment for office involves debt and equity and is not designed to support short-term leasing. These challenges have created the opportunity for coworking to flourish. But even the coworking market is shifting to place increased risk on the landlord. Whereas the historical model called for the operator to lease space from the landlord on a long-term lease at market rents, today’s softer markets have permitted operators to negotiate revenue sharing arrangements that avoid committing to a market rent. In some cases, there is a minimum rent, in others the operator is permitted to recoup its operating costs first, before sharing revenue. Deal structures are highly situational.
At some point soon, pioneering investors will look to advance a different product offering using different financial assumptions. Instead of attempting to work around changes in how the consumer consumes their product, they’ll embrace them. They’ll provide highly flexible leasing solutions directly to the consumer, eliminating the middleman (the coworking operator). Already, we’re seeing some large, institutional landlords dabble in this market (e.g., Tishman with its Studios brand). But what other novel solutions might we see?
One solution that has strong potential is for landlords to offer tenants the ability to relet their space on demand. In other words, offering existing tenants who are not coworking operators the option to satisfy high flex demand and offset their own rental obligations. If you look at a market like San Francisco, for example, plagued as it was by a massive wave of sublease space beginning in late 2020, the ability to offer highly flexible space solutions, on demand, would have activated large swaths of unused space, solving 2 problems, 1) vacant space that is not generating income for the sublandlord and 2) flexible space solutions that allow occupiers to use space as needed. How would this work in practice? Airbnb. Imagine the same principals applied to office space. You have an app-based platform on which companies can market unused or under-used space, consisting of all or a portion of their leased space. Users can elect to use the space for short term occupancies, ranging from a few days to months or years. The logistical challenges center around how the building is managed. Currently, most institutional office buildings require a complicated process and approvals before a tenant can sublease space. This process stands in the path of efficiently addressing on demand leasing requirements. Coworking providers, in contrast, are permitted to address the on-demand market via licensing agreements. Why not permit the tenant to do the same? If this contractual element were modified to provide the long-term, prime tenant with such flexibility, it could make the space solution significantly more valuable by giving the occupier a new way of solving for the realities of changing use cases over a long period. “Airoffice”. Maybe this is among the ways the office product will continue to evolve.