What’s Wrong With Office Leasing

In spite of the real estate industry pressing forward to adapt technologies to make buildings more efficient, the process of leasing office space remains mired in archaic practices. With the exception of email replacing faxes, which replaced mail and messengers for transmitting documents, the office leasing process has remained virtually unchanged since the mid-20th century. Ironically, some of the technology adapted in office leasing have only made the process MORE cumbersome. For example, putting PC’s on every lawyer’s desktop has bloated the size of lease documents as well as increase the time and expense to negotiate a final lease. Prior to the PC, lease documents were photocopied forms, a fraction of the length of today’s documents and changes were negotiated via hand-typed lease addenda, with edits in the margins of the body of the document. We estimate that the time and cost of negotiating a lease has grown by 20-50% since the turn of the century.

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Even with instant messaging, email, financial analysis programs and computer aided design, the nuts and bolts of finding, negotiating, executing and paying for office space remains unchanged, if not more complex and labor intensive. Describing the use of technology in current office leasing practices is akin to the way John F. Kennedy describing Washington, DC as combining the “efficiency of the south with the politeness of the north”, except that leasing combines the technology of massive document exchange with the labor of an otherwise bygone era.

How did we get this way? Vested interests have had little motive to change. Increasingly large and more complex legal documents translate into more lucrative real estate law practices. Landlords and lenders tend to prefer longer leases since they’re designed to protect their interests. Brokers receive the same fees irrespective of the lease size and larger transactions are adequately lucrative to overcome the pain of so much heavy lifting. It’s difficult to argue for simpler, shorter lease forms when an attorney may counter that simpler forms may increase a landlord’s risk.

So, as archaic as the leasing process may be, it still works adequately for the industry. Tenants requiring multi-year leases and the ability to construct their premises to their specifications will require a more complex document than a short term, as-is, “spec suite”¹.

The legacy process breaks down for small spaces (typically <5,000 square feet) and short term leases (< 3-5 years), where there’s no economies of scale to spread the cost of legal fees, planning and construction of tenant improvements.   These small, short term transactions define the “pain point” of the commercial real estate industry. Coincidentally, the pain point is growing rapidly, as an increasing number of companies are searching for flexible, on-demand office space options.

The solution for addressing inefficiencies of (small) scale are within reach, but require adopting current transaction technologies and industry acceptance of transacting in a lower friction environment. Tenants in the pain point don’t need convincing. They’re already acutely aware of the failings in the conventional office leasing market. Resistance to change is anchored with vested interests in the legal and brokerage sectors.  The key to industry wide change will be driven by the building owner/asset management sectors. Most building owners and landlords are open for solutions to solve for the pain point, but are reluctant to invest in unproven platforms.  When a critical mass of building owners decide to support a  streamlined, online leasing process, their brokers and attorneys will adapt…and thrive.

¹ Spec Suites are standalone offices that have been constructed on a Speculative basis in the hope of attracting a tenant looking for immediate occupancy.

 

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