By James A. Schnur, CCIM
President and Designated Managing Broker
Integrated Real Estate Solutions
LinkedIn
The commercial real estate market was significantly impacted by the COVID-19 pandemic, with various sectors experiencing different challenges. Commercial landlords had to adapt to allow for more flexible solutions to offer tenants due to the increase in remote work, restructuring, and relocation.
Remote work, a growing trend in space utilization prior to the lockdowns, accelerated and became much more prevalent and often the preferable situation for many workers and employers. Employees found ‘working from anywhere’ gave them greater freedom while businesses saw an increase in productivity.
As businesses started offering more remote or hybrid work policies, they began to cut costs by downsizing their commercial footprints. Although some organizations encouraged their employees to spend some time in the office, they did not need as much space post-pandemic. Companies began to restructure and relocate, and there was a need for flexibility in their lease arrangements as they began to expand or contract. Learn more about the most common types of flexible lease agreements in commercial real estate, their benefits, and what to consider before entering into a flexible lease agreement.
What is a flexible lease arrangement?
A flexible lease arrangement is an agreement between the landlord and the tenant that allows the tenant to expand or contract its business footprint, change the length of its lease, or enable a tenant to broker a sublet or co-working situation. This flexibility may come with higher costs to the tenant, but it offers a business the ability to adapt to changing environments (rapid growth, restructure, relocation), to pay only for the space actually used, and, if necessary, terminate a lease.
What are the most common types of flexible lease agreements?
- Short-term leases: Short-term leases, often ranging from a few months to a couple of years, provide tenants with the flexibility to scale their operations or relocate based on their business requirements. This type of arrangement is particularly appealing to businesses with uncertain growth trajectories or those in need of temporary space.
- Co-Working Spaces: The popularity of co-working spaces has soared in recent years. These shared office environments allow businesses to lease space on a flexible, often month-to-month, basis. Co-working spaces provide the benefits of a fully equipped office without long-term commitment, making them attractive to freelancers, startups, and established companies alike.
What are some of the benefits of flexible lease agreements?
- Flexible Terms: Flexible commercial leases are generally shorter term but may carry a higher rental rate. Tenants can negotiate for term extensions by including a renewable option in the lease. This option allows the tenant to renew or extend the term of the lease when certain conditions are met, such as the tenant informing the landlord of the desire to extend within a certain period of time.
- Flexible Footprint: These flexible commercial leases make it easier for tenants to expand or, if needed, contract their office spaces. Rather than committing to a longer-term lease and a fixed amount of space, tenants can lease a smaller unit until the organization reaches its growth milestones. A right of first refusal clause in a flexible commercial lease provides an organization the ability to obtain adjacent space as it becomes available.
- Flexible Location: Shorter terms also allow for the possibility of a relocation. Businesses that anticipate a relocation should negotiate for leases allowing for sublet agreements and a move to a larger unit under the current lease. As mentioned earlier, a tenant should negotiate right of first refusal options on adjacent spaces, ensuring their business will have additional square footage in the future without breaking its lease.
What should a tenant consider before entering into a flexible lease arrangement?
- Current Economic Environment: Does the current economic environment promote stable growth over the next several years, or could a volatile market in the short term mean spurts of rapid growth or prompt a need to downsize? Can the business afford to trade flexibility for savings in other items such as leasehold improvements?
- Financial Outlook: Flexibility in the short term may come with additional costs. Does the lower rental cost of a long-term lease trump flexibility?
- Business Strategy: To achieve its business strategy, does the organization need the options offered by a flexible lease arrangement?
Conclusion
The landscape of commercial real estate is evolving, and flexibility has emerged as a central theme in lease agreements. Businesses are increasingly seeking arrangements that allow them to adapt to the fast-paced and unpredictable nature of today’s markets. Landlords who embrace flexibility not only meet the changing needs of tenants but also position their properties for long-term success in a dynamic and competitive real estate environment. As the trend towards flexibility continues, look to the professionals at Integrated Real Estate Solutions, Inc. to help negotiate the important items to include in a flexible commercial lease to fit your business strategy.
Integrated Real Estate Solutions, Inc. provides clients with the in-depth knowledge and experience that is critical to determine the right path to your next move, lease renewal, or strategic repositioning of your real estate portfolio. Contact us or call 847.550.0160 today about your needs and put our success to work for you.
