This article was published in the Fall 2019 issue
of Silicon Slopes Magazine
by Eric Smith and Kreg Peterson, CBRE
In recent years, tech businesses seeking to remain nimble in a rapidly evolving economic environment have grown more interested in flexible real estate strategies. The ability to match your real estate to your company’s growth rate is a strategic advantage. Historically, commercial real estate has solely been viewed as a costly expense or a necessary evil; companies need a place to conduct business, but knowing how much space is needed and how long to stay in a space has been left to someone’s ‘best guess.’ There weren’t many options providing for agility within real estate — until recently.
Manufacturing and distribution have found ways to turn a portion of their real estate ‘fixed costs’ into ‘variable costs’ by implementing ways to swiftly adapt to business fluctuations. During the current business cycle, we have seen a variety of industries and organizations follow suit in exploring ways to make their real estate more nimble — a concept being coined as ‘agile’ real estate. With agile real estate, your real estate can work with you as your company size fluctuates, which is a game changer for the startup community.
In a culture where many companies are born in basements and garages, it’s easy to see how entrepreneurs may not be excited about signing a long-term lease once their company begins to grow. There is still a lot of uncertainty in the first handful of years a company begins to take off — how quickly will the company grow? How many people will be hired? How much space can they afford? Where will they attract the best talent? Do they even need an office? How can startups approach these critical questions? Enter: agile real estate.
Within agile real estate there are several options companies can consider in developing the best strategy for their organization, each offering various trade-offs from control and branding to speed and flexibility.
But what about costs? Which option is most expensive?
When considering leasing your own space, there can be many expenses that occur upfront: furniture, IT, cabling, construction, and contractor and architectural fees to name only a few. These capital expenditures can be extensive and since the longer a company stays in one place the longer this cost can be spread out, companies have the incentive to sign longer leases. In contrast, these building and operational costs are included in the overall price of a flexible lease so the costs stay relatively flat throughout the years. CBRE Research shows that the costs of these two options converge around year four, at which time it becomes relatively more expensive to be in flexible space.
The problem with this model is that it assumes you can predict the future with certainty and that the number of employees will be constant. Of course, these things are impossible to predict. When making the same comparison but adding in uncertainty in employee headcount and market volatility, the two costs never converge. The conclusion drawn from this is that the value of flexibility is actually greater than the cost of flexible space.So what do you do if you’re a startup or emerging company looking to occupy real estate? First, determine how quickly you think your company will grow. If you have a rapidly growing company, and you expect that growth to continue for several years, it might make sense to stick with a flexible lease option until you reach certain scale. If you are a startup, but you foresee more slow and steady growth, it might make sense to opt for a sublease or long-term lease to begin with, and then utilize shared workspaces as an option for any overage your company may experience. In any case, keep in mind the ideal that the value of flexible space is greater than its cost, so it may be a good idea to keep an open mind when it comes to analyzing your real estate costs. Whatever you decide, be sure to build in opportunities for agility to keep your real estate as manageable as your organization.
Read the rest of the articles in the
Fall 2019 issue of Silicon Slopes Magazine