Leasing Office Space Doesn’t Have to Be Complicated

017c17b4e5065ad7a88523cb2ecdfbc357e3c6735dWhy aren’t tenants able to search, compare, negotiate, execute and pay for their office space online? Virtually every other major financial transaction can be navigated via an online platform, why not commercial real estate? Certainly owners of commercial real estate (CRE) could dramatically reduce their transaction costs through the efficiencies of an online platform. Likewise, Tenants could benefit hugely from a fully transparent, low friction marketplace. Commercial Real Estate Brokers could create more value for their clients while saving a significant amount of time and effort generating reams of proposals and ancillary documents.

In the current state of the art, CRE transactions are a highly laborious process that’s remained virtually unchanged for 50+ years. Sure, technology has crept into the industry.   CRE professionals adopted a variety of technologies to speed communication (mail & messengers were supplanted by fax machines, which were replaced by email, texts, drop boxes, etc.). Computing power has given the CRE industry the ability to generate highly sophisticated financial analyses, assist in architectural and interior design and produce transaction documents.  However, some of the key technologies adopted by the CRE industry have been a double-edged sword, creating unnecessary complexity and making transacting significantly more difficult. Document processing in particular has been the Tar-Baby of technologies. “Back in the day” transaction documents were short & simple forms, negotiated with handwritten comments in the margins and via typed amendments attached to the body of the agreements.  As soon as personal computers started arriving on attorneys’ desks, leases, requests for proposals and other transaction documents started expanding dramatically. Standard leases in the early 1980’s (Pre-PC) were virtually always less than 20 pages long (8-10 pages was average). Leases today have reached the size of short novels, except they’re really boring and totally devoid of adventure, romance and humor. Currently the body of typical office leases ranges from 120-150 pages. Reams of exhibits push total lease sizes to over 200 pages.

Huge leases and complex analysis still require human review and input. They also take longer to create and negotiate. Following an executed Letter of Intent (LOI), it frequently takes a couple of weeks just to receive a first lease draft. Lease negotiations frequently require 60 – 90 days and legal fees may run into the tens of thousands of dollars for both sides. This may be a boon for lawyers but can be a true hardship for the other parties to the deal.  The reason the CRE industry puts up with this inefficiency is simply due to scale. Larger transactions tend to have long lead time and can easily cover the expense associated negotiating today’s leases.

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The system breaks down where there’s no economy of scale.  Smaller transactions (< 5,000 square feet) in particular are a huge pain point for the industry precisely for these reasons. Small deals use the same, unwieldy lease form and are subject to the same hurdles of complexity and timing. Unfortunately, smaller office lease deals are oftensubject to being more lightly negotiated in order to reduce legal fees.

We believe the solution for resolving the issue of leasing complexity is to use technology to streamline and remove as much friction as possible from the process. At a minimum “Transaction Engine” should make the lessor and tenant able to negotiate a letter of intent and instantly generate an initial lease draft, using ANY lease form. Many enlightened landlords believe that their standard lease forms could be greatly simplified for smaller sized offices, especially for “as-is” Spec Suites. Utilizing a platform based Transaction Engine will not eliminate any jobs, only make it easier for all parties. Tenants will still require professional advice of a trusted broker. Lawyers will still be required to review and negotiate leases. Landlords will still have to market, tour and manage their properties. A well designed, platform based Transaction Engine can hugely simplify office leasing and has the potential to finally transform the CRE  industry into the 21st Century. Better late than never.

 

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