New Realities Lead to New Approaches to Office Leasing

Advertising agency owner LaJuana Mitchell-Smith says she has found the perfect roommate in Kimalica Guynes, a quiet, responsible professional like herself who can pay the rent on time.

But the two women don’t share an apartment. Their common space is a 2,200-square-foot office in north Glendale that was too big for Mitchell-Smith’s six-person ad agency. Guynes, a mortgage sales manager, and two assistants moved in this month and occupy about one-third of the office.

“I think we are going to fit well,” said Mitchell-Smith. “Right now everybody is pretty enthusiastic.”

The two firms are among the growing ranks of businesses embracing alternatives to the long-term, single-tenant lease that has been the rule in commercial real estate. Office sharing and short-term office-suite rentals have grown in popularity in response to high rents, a space shortage and a volatile business environment.

Long leases are often incompatible with the new generation of high-tech start-ups that can double in size--or disappear--overnight. Even large “old-economy” corporations that once committed themselves to 10- and 20-year leases want more flexibility in case their strategies change or business drops off.

“Many firms are finding that traditional leases are subject to all new variables . . . that are not easy to predict,” said Stuart Gabriel, executive director of the Lusk Center for Real Estate at USC. “That’s where these new arrangements come in.”

Landlords have never liked short-term leases. In many cases, property owners are bound by loan terms that require they deal only with large tenants that sign leases for at least 10 years. But increasingly, landlords are being forced to consider shorter terms. A survey of deals brokered by CB Richard Ellis showed that the average lease term for spaces of 50,000 square feet or less fell from 8 1/2 years to about seven years during the 1990s.

“Landlords are starting to recognize now that there is a widening gap between what they want and what tenants want,” said CB Richard Ellis leasing broker Whitley Collins. “I think the [average lease length] will continue to go down.”

The demand for more flexible office concepts also signals a change in perception. Shared office space or a lease by the year--not to mention by the month--were once widely viewed as signs of a shady, unstable business. A long-term lease and your company logo on the door symbolized reliability.

The stigma was so strong that when Bob Gaudreau operated short-term office suites in New York during the 1980s, he kept his company’s name off the entrance to avoid tipping off visitors. Today, Gaudreau heads the U.S. operations of Regus Business Centres Corp., which is not shy about posting its name on a fast-growing chain of business centers, where tenants ranging from one-person start-ups to Fortune 500 companies can rent a single office or a whole floor on a short-term basis.

The average starting lease is only nine months, and as many as 60 different tenants may occupy Regus’ largest business centers. Regus provides nearly all office equipment, from furniture to fax machines, as well as receptionists and other support staff. Instead of spending six months or more to find a space, negotiate a lease and complete construction, a tenant can move into a business center or executive suite in a matter of days. Many companies will pay two or three times the prevailing long-term rents for that kind of speed and flexible lease terms.

“Their workers just have to show up,” Gaudreau said.

Many who specialize in short-term and flexible rental space have been surprised by the strong response from corporate tenants. Jeffrey A. Landers, a former New York real estate broker, focused on small businesses when he started Offices2share.com last year. But the Web site, which features space available for sharing, has attracted many large corporations eager to fill empty offices that are not suitable for a long-term sublet.

The giant accounting and consulting firm Deloitte & Touche recently listed six floors of vacant space in its former downtown Los Angeles offices on the Offices2share.com site. The fully furnished space, at 1000 Wilshire Blvd., is available for 17 months only, but a fast-growing Internet company has already expressed interest in moving in, said leasing broker Dennis Smith of Travers Realty.

“The smaller tenants that have an immediate need are the ones we see as our customer,” Smith said.

In the years ahead, as much as 20% of all office space will be available on a flexible basis, Gaudreau and other real estate executives predict. Operators of flexible office space will probably look for inspiration to the hotel industry, where a wide range of facilities--from luxury hotels to no-frills motels--target specific types of tenants and budgets.

“We are still in our early days,” Gaudreau said.