A New Product

Office space is a product. In the US, that product has been offered and consumed in largely the same way for decades. That is beginning to change.

Investors are exploring more creative ways to monetize office space. One example is the speculative construction and furnishing of space that can be leased on more flexible terms than those traditionally offered, including short-term leases of less than three years. Tenants like this approach and are often willing to pay a premium to avoid the friction inherent in the traditional leasing process. That friction includes the need to design, build, and furnish space, along with the long-term commitments required to support business needs that are constantly evolving.

Beyond changes to the physical product, landlords are also rethinking pricing. Historically, office leases have required tenants to pay a base rent plus their pro rata share of operating expenses. Those expenses are structured in different ways, such as full-service leases with a base year, NNN leases, or variations in between. Regardless of structure, the outcome is the same: fixed rent paired with variable costs, making total occupancy expense difficult to predict.

Some landlords are now simplifying this model by collapsing base rent and operating expenses into a single, fixed rent. While this rent typically increases annually by a defined measure, it is otherwise predictable and easy for tenants to understand and budget.

There is meaningful demand for office space that is occupancy-ready, offered on flexible terms, and priced with clarity. Thoughtful investors will begin carving out portions of their buildings for these offerings. While this space cannot be monetized in the same way as traditional long-term leases, over comparable time horizons it can generate significantly higher cash flow through premium rents and stronger residual value that reduces downtime between occupancies.