When Gabriel Safar’s real-estate software startup LeasePilot had seven employees, it was headquartered in a WeWork space in Boston’s Back Bay. But as the company grew, so did Safar’s need for more room.
LeasePilot employees needed quiet places to work, a professional atmosphere in which to bring customers or board members, and an office with the company’s own address and branding. But Safar couldn’t imagine thinking beyond a six-month time horizon, let alone signing a typical 10-year lease, which most downtown landlords require for standard office space.
“Every time I have a recruiting plan in place, it’s wildly wrong,” Safar said of his company’s hiring and growth. “What drives our space needs are people, and I just don’t know when I’m going to find them.”
Enter Boston Properties (NYSE: BXP), one of the city’s largest landlords, and a new flexible office-space concept that would allow for a month-to-month lease versus a 10-year term. It’s called FLEX by BXP.
LeasePilot was the first tenant in FLEX by BXP, which launched on the 29th floor of the Prudential Tower last July. LeasePilot described its move in a blog post this way: “For us, it’s perfect: Standing desks and chairs are provided, internet is included, and the walls are whiteboards (literally — every interior wall is fitted with floor-to-ceiling whiteboards). We have room to grow and one hell of a view.”
FLEX by BXP is just one of a growing number of flexible office concepts launching in Boston and other U.S. cities. Others include Tishman Speyer’s Studio and CBRE Group Inc.’s Hana. Experts say the concepts are in response to tenants’ demand for more adjustable lease terms and to the speed at which venture-backed companies need offices as they grow.
“Tenants — not only startups, but more established companies — desire more flexibility to grow or contract or expand on a much quicker timeline than, necessarily, traditional leases allow for,” said Jessica Hughes, a managing director with Tishman Speyer and regional director of the firm’s Boston office.
It’s also a reaction, at least in part, to Boston’s co-working explosion. Co-working is not a new concept: Regus, one of the original shared office space concepts, that’s now known as IWG plc, was founded 30 years ago. However, the newer iterations, led by co-working giant WeWork, have expanded rapidly just in recent years.
Indeed, since 2014, WeWork has gone from having no presence in Boston to occupying more than 1 million square feet, making it one of the city’s largest tenants.
At the same time, co-working facilities with similar business models — including Workbar and Industrious — have expanded to multiple locations throughout the region, while popular woman-focused space The Wing just opened in Back Bay, and New York-based Knotel is on the hunt for space.
However, the new flexible office spaces are much less like the corporate office world of Regus and much more like an amenity-driven luxury hotel lobby, complete with Instagram-friendly wallpaper, fruit-infused water and comfortable seating options.
The spaces appear to be doing well. Boston Properties leased out its first FLEX by BXP space in the Prudential Tower in about a month, and plans to roll out the concept to full floors at 100 Federal St. and The Hub on Causeway in Boston and two Waltham locations. For its part, Tishman Speyer just landed a five-year, 100-desk deal with online fantasy sports betting website DraftKings Inc. at Studio, its flexible office at 125 High St. — just three months after DraftKings doubled its headquarters size with a move to the Back Bay.
DraftKings CEO Jason Robins said that his company has “grown much faster than projected,” and is searching for overflow space in Boston while seeking to expand at 222 Berkeley.
The speed with which companies can occupy flexible offices is also a big plus, said John Boyle, vice chair of Cushman & Wakefield. Executing a standard office lease would take anywhere from seven months to a year, including negotiating a transaction, laying out space, getting permits and building. But that’s often too long for venture-backed and private-equity backed companies that need to get workers in seats quickly, Boyle said.
“Landlords do need to have a quick, efficient solution for some users, as opposed to no solution. And that is certainly taking hold,” Boyle said. “High quality landlords with scale are going to consider this alternative, as they want to grow and be a place of refuge for high-growth users of tomorrow.”
Amenity-driven flexible spaces can be much more attractive to a young company that’s fighting for talent than a cold, corporate atmosphere, said Wil Catlin, managing principal of Boston Realty Advisors. It’s a big plus to have those amenities taken care of, he said. “If you’re a 5,000-square-foot tenant, you can’t offer the soup-to-nuts like WeWork can. It’s just really difficult,” Catlin said.
Beyond responding to tenant demand, flexible office spaces also ease the headache of subleasing, both for a landlord and for a tenant trying to either find a subletter or pay a landlord for space they’re not using.
However, it also means landlords can charge a premium for turnkey flex space that’s move-in ready, Catlin said. “If you can have a two-year commitment instead of five, you can pay a premium for it — 20 percent to 40 percent over a standard office lease,” he said.
That premium can help convince wary investors or risk-averse board members of the importance of pursuing deals outside a standard long-term lease period.
Boston Properties, Tishman Speyer and CBRE all own or manage national or international portfolios, so keeping a company in a flex-term office is a good way to keep a client within that portfolio, said Aaron Jodka, director of research for Colliers International in Boston.
“They’re dipping their toe in with a floor,” Jodka said. “Market conditions are great. They don’t have to fill big blocks of vacancy right now. Three years from now, four years from now …. do you see that as essentially your incubator of a company that can grow within your portfolio?”
High rent, low risk
Boston Properties, for example, owns about 14 million square feet in Boston, so testing a few 25,000-square-foot floors doesn’t present much risk, said Bryan Koop, executive vice president of the Boston Region for the company. What’s more, the company can take space that would have gotten about $50 in rental rates on a short-term deal, and charge around $80 per square foot.
“It’s an opportunity for our shareholders to see rent growth, and also take spaces that would probably be getting less total gross rent — but when you package it as flex, it gets a premium,” Koop said. “The customer sees it as a real value proposition, in that what they’re getting is the ability to get a short-term lease, not having to sign up for personal liability or corporate liability, and the ability to shut things down very fast.”
Other landlords have considered flex space, but have little maneuvering room within their portfolios. Oxford Properties, for example, had considered a flex option at 500 Boylston St./222 Berkeley St. — home to the new DraftKings headquarters — prior to landing that deal as well as the 395,000-square-foot Wayfair deal, said Matthew Polhemus, Oxford’s senior leasing manager in Boston. But once the DraftKings and Wayfair deals were signed, the Toronto-based landlord had no more room for flex space.
“There’s an insatiable appetite for built space that’s flexible, and that comes in a lot of different forms and features,” Polhemus said. “It’s something that we’re always discussing, and whether it’s something we do or partner with, we’re not really sure what direction we’re taking in the future.”
As the co-working surge continues, and the war for talent in Boston becomes even more frenzied, experts say the pathway for landlord-driven flexible office space will only stretch further.
“Real estate is a slow-moving animal,” Jodka said. “They found a way to speed it up and make it efficient, which is a key value.”