4 ms·

"We might not be around in 6 months!" What kind of premium were you prepared to pay for this risk to the owner? If your answer is <10%, or even <50% depending

by roel_v 13y ago

"We might not be around in 6 months!" What kind of premium were you prepared to pay for this risk to the owner? If your answer is <10%, or even <50% depending on the actual amounts we're talking here, do you find it irrational that you had trouble finding an office?

mattmanser 13y ago
What risk? That they'll have to pay advertising again? Because if you don't move in, it's still empty.
- mkohlmyr 13y ago
  Assuming no-one else wants the space. If no-one was interested in or willing to sign a 3 year contract they wouldn't be able demand it.
  - tmwatson100 13y ago
    Absolutely agree. There are still plenty of companies out there who have the relevant covenants and ability to sign that 3 year lease. However, as the economy evolves and high growth companies companies become the norm the number of people willing to commit to a 3 year lease will start diminishing. This not just because they are not able to forecast their financials, but they are not able to forecast their staff numbers either. It's an interesting time for commercial property and it'll be intriguing to see how this plays out.
- tmwatson100 13y ago
  Hi Matt, Completely agree. At the end of the day markets depend upon supply and demand forces. The economic landscape looks much different to what it did 10 years ago. Smaller companies that need contract flexibility are springing up everywhere, and the demand for flexible space is increasing. There's only so long this can be ignored by those operating or owning commercial space.
- roel_v 13y ago
  This post just shows that you have never let out any real estate. Let me tell you, it's not as simple as this. It's not just the 50$ or whatever to put up one online ad. You need to advertise on several websites plus offline. You need to show around various candidates, and do background checks on the serious ones. You have to transfer utilities, deal with mail, and other assorted tasks when somebody moves in. All of this for (in terms of yield) slim margins. And assuming that nothing is damaged or needs fixing up after somebody moves out. Now, for commercial space it gets worse. When they go out of business, it's highly unlikely that you will recover the owed rent - likely several (2-3) months. Commercial real estate is vacant for longer, and having a tenant 'in between' basically 'resets' the cycle of getting a new tenant. (businesses take a few weeks to months before deciding, residential is usually faster, i.e. faster turnover) Also, businesses usually make changes when they move in, not always for the better (network rewiring, dividing space etc for offices - for storefront it's much worse still). If they go bankrupt, you as the owner are stuck with the cost of repairing. The deposit (a paltry 2 or 3 months rent) is usually not sufficient. Again, all of this is assuming that there are no 'real' troubles - no lawyers involved, no 'real' renovations needed after they move out, ... Just the cost of getting somebody to dispose of an abandoned office full of furniture costs a month rent, because second-hand office furniture isn't worth anything! For me, I don't bother with terms of < 6 months for rentals, not even for a 100% premium (residential that is, I don't do commercial). And 1-year leases I only take as a 'probation' period, if it's clear from the beginning that they have no or little intention on staying longer, I won't accept such a candidate. Financially it just doesn't make any sense, and I'm not even counting the stress and the hassle.
  - mattmanser 13y ago
    For me, I don't bother with terms of < 6 months for rentals...I don't do commercial Well there you go. The standard in residential is 6 months - year, so what are you talking about? It sounds like someone trashed your residential house and you're personally angry about it. Being screwed over is a risk of doing any business and you can't take it personally. Some people will screw you over, not pay invoices, bills, etc. You can't base all your future dealings off that one event.
tmwatson100 13y ago
Hi roel_v, In our experience we have found that there ARE spaces available for companies such as Chris' that have little idea of where they will be in 6 months time. At the end of the day, startups and becoming more and more commonplace and the demand for space with contract flexibility is going up with it. It is up to landlords and operators of space to decide how they react to this. They can either ignore it, leave the space open until their find their 5 yr client. Or they can attach a slight premium to the space and rent it for a more flexible term. In general, we have found that space operators and landlords and increasingly accommodating for this and are attaching a risk premium. It may not be as high as 40% but there is something there. They achieve this by paying rent on a sq ft basis, but letting out the space on a per desk basis. If you do the maths, you can achieve a relatively attractive spread assuming x% occupancy. We believe that Spacious can help liquidity in the market by making landlords and space operators confident that if they react to shorter contract lengths, they won't have to worry about long periods of vacancy as a potential tenant would be able to find them easily.
- roel_v 13y ago
  Sure, as a 'co-working' concept, it exists. So maybe the GP was referring to that, but then again (while I don't know the specific market in London), there is plenty of supply in that market in every big Western city I know a bit about, so I assume the same for London. Then again you pay 100% premium on those spaces. What I was reacting to is what I hear relatively often - 'hey my house/room rent is X / m2, why can't I find an office for that price? It's just me and my buddy and we're broke and most likely out of business in 6 months, why don't landlords love us?'. "We believe that Spacious can help liquidity in the market by making landlords and space operators confident that if they react to shorter contract lengths, they won't have to worry about long periods of vacancy as a potential tenant would be able to find them easily." It's not clear to me what you're doing any more, since you seem to contradict yourself. Are you about making landlords turn themselves into coworking spaces, or do you have some way to guaranteeing a higher occupancy rate for owners, or are you just Craigslist for office space, like there are a zillion others? What's your added value? The coworking space is so crowded, I don't see any savvy owners who are not in dire straits dive into that market any more in 2014. There is vast oversupply (at least at price levels that make it profitable) in the (admittedly small, niche and out of the way) markets I know about. Those who tried it find out very soon that the small hidden costs add up very quickly, and that it's a completely different kind of business from 'just' renting out property (and a business most don't want to be in).

by roel_v 13y ago

mattmanser 13y ago

What risk? That they'll have to pay advertising again? Because if you don't move in, it's still empty.

mkohlmyr 13y ago
Assuming no-one else wants the space. If no-one was interested in or willing to sign a 3 year contract they wouldn't be able demand it.
- tmwatson100 13y ago
  Absolutely agree. There are still plenty of companies out there who have the relevant covenants and ability to sign that 3 year lease. However, as the economy evolves and high growth companies companies become the norm the number of people willing to commit to a 3 year lease will start diminishing. This not just because they are not able to forecast their financials, but they are not able to forecast their staff numbers either. It's an interesting time for commercial property and it'll be intriguing to see how this plays out.
tmwatson100 13y ago
Hi Matt, Completely agree. At the end of the day markets depend upon supply and demand forces. The economic landscape looks much different to what it did 10 years ago. Smaller companies that need contract flexibility are springing up everywhere, and the demand for flexible space is increasing. There's only so long this can be ignored by those operating or owning commercial space.
roel_v 13y ago
This post just shows that you have never let out any real estate. Let me tell you, it's not as simple as this. It's not just the 50$ or whatever to put up one online ad. You need to advertise on several websites plus offline. You need to show around various candidates, and do background checks on the serious ones. You have to transfer utilities, deal with mail, and other assorted tasks when somebody moves in. All of this for (in terms of yield) slim margins. And assuming that nothing is damaged or needs fixing up after somebody moves out. Now, for commercial space it gets worse. When they go out of business, it's highly unlikely that you will recover the owed rent - likely several (2-3) months. Commercial real estate is vacant for longer, and having a tenant 'in between' basically 'resets' the cycle of getting a new tenant. (businesses take a few weeks to months before deciding, residential is usually faster, i.e. faster turnover) Also, businesses usually make changes when they move in, not always for the better (network rewiring, dividing space etc for offices - for storefront it's much worse still). If they go bankrupt, you as the owner are stuck with the cost of repairing. The deposit (a paltry 2 or 3 months rent) is usually not sufficient. Again, all of this is assuming that there are no 'real' troubles - no lawyers involved, no 'real' renovations needed after they move out, ... Just the cost of getting somebody to dispose of an abandoned office full of furniture costs a month rent, because second-hand office furniture isn't worth anything! For me, I don't bother with terms of < 6 months for rentals, not even for a 100% premium (residential that is, I don't do commercial). And 1-year leases I only take as a 'probation' period, if it's clear from the beginning that they have no or little intention on staying longer, I won't accept such a candidate. Financially it just doesn't make any sense, and I'm not even counting the stress and the hassle.
- mattmanser 13y ago
  For me, I don't bother with terms of < 6 months for rentals...I don't do commercial Well there you go. The standard in residential is 6 months - year, so what are you talking about? It sounds like someone trashed your residential house and you're personally angry about it. Being screwed over is a risk of doing any business and you can't take it personally. Some people will screw you over, not pay invoices, bills, etc. You can't base all your future dealings off that one event.

tmwatson100 13y ago

Hi roel_v, In our experience we have found that there ARE spaces available for companies such as Chris' that have little idea of where they will be in 6 months time. At the end of the day, startups and becoming more and more commonplace and the demand for space with contract flexibility is going up with it. It is up to landlords and operators of space to decide how they react to this. They can either ignore it, leave the space open until their find their 5 yr client. Or they can attach a slight premium to the space and rent it for a more flexible term. In general, we have found that space operators and landlords and increasingly accommodating for this and are attaching a risk premium. It may not be as high as 40% but there is something there. They achieve this by paying rent on a sq ft basis, but letting out the space on a per desk basis. If you do the maths, you can achieve a relatively attractive spread assuming x% occupancy. We believe that Spacious can help liquidity in the market by making landlords and space operators confident that if they react to shorter contract lengths, they won't have to worry about long periods of vacancy as a potential tenant would be able to find them easily.

roel_v 13y ago
Sure, as a 'co-working' concept, it exists. So maybe the GP was referring to that, but then again (while I don't know the specific market in London), there is plenty of supply in that market in every big Western city I know a bit about, so I assume the same for London. Then again you pay 100% premium on those spaces. What I was reacting to is what I hear relatively often - 'hey my house/room rent is X / m2, why can't I find an office for that price? It's just me and my buddy and we're broke and most likely out of business in 6 months, why don't landlords love us?'. "We believe that Spacious can help liquidity in the market by making landlords and space operators confident that if they react to shorter contract lengths, they won't have to worry about long periods of vacancy as a potential tenant would be able to find them easily." It's not clear to me what you're doing any more, since you seem to contradict yourself. Are you about making landlords turn themselves into coworking spaces, or do you have some way to guaranteeing a higher occupancy rate for owners, or are you just Craigslist for office space, like there are a zillion others? What's your added value? The coworking space is so crowded, I don't see any savvy owners who are not in dire straits dive into that market any more in 2014. There is vast oversupply (at least at price levels that make it profitable) in the (admittedly small, niche and out of the way) markets I know about. Those who tried it find out very soon that the small hidden costs add up very quickly, and that it's a completely different kind of business from 'just' renting out property (and a business most don't want to be in).