Death of the Net Lease

Many years ago, rent was simple. A business moved into a building, and sent its landlord a check every month. Perhaps that tenant paid directly for the services that got billed to it (like communications, coffee service and maybe electricity), but it generally knew what it would pay, when it would pay it, and how much those payments would change from month to month or -- more commonly -- from year to year.

Then landlords came up with the net lease. These leases were great deals for landlords in that they shifted many of the risks of building ownership and operations to the tenants. If water rates went up, landscapers added fuel surcharges to their monthly bills, or repair costs spiked, the tenant would pay it. Of course, there was room for some tenants to save money, too, if they were very responsible stewards of the building's resources, they could actually lower their cost of occupancy. Realistically, though, net leases are usually ways to reduce risks for landlords and potentially increase costs for tenants.

One of the fundamental changes of the 21st century has been the movement towards shedding risk and turning corporate functions into third party services. Server farms became virtual clouds maintained by third parties and paid for on an as-needed basis. Software is now purchased on an as-a-service basis through the cloud, avoiding the need for servers, maintenance and license fees. Companies use rental car "fleet management" companies to replace their internal fleets. And more and more workers are being turned into contractors as the reach of the gig economy spreads.

Commercial real estate is changing, too. One of the first trends to come out of the last decade or two of the 20th century was outsourcing corporate real estate departments. Beyond just hiring a tenant rep, some companies sent all of the work to maintain their portfolio of spaces to third parties. In addition, two trends are striking closer to home relative to how companies rent space:

Space-as-a-service (coworking)
Gross, Clear, and Anything-But-Net Leases

Space-as-a-Service

One way to eliminate the cost and uncertainty of a net lease is to turn space into a service. Office and industrial space providers now offer the opportunity to lease turnkey space on a short-term basis. This way, for a flat monthly fee, your business can get exactly the space that it needs at a single, preset price -- the exact opposite of a net lease. Furthermore, space-as-a-service is flexible. You can occupy 20 desks this month, drop down to 15 next month, and increase to 30 next year. Shared industrial space offers similar flexibility.

These options are usually more expensive on a per-square-foot apples-to-apples basis than a long-term net lease. However, if your company's needs are variable, they may offer the opportunity for real savings.

Gross, Clear, and Anything-But-Net Leases

In traditional long-term leased space, some landlords are returning to more tenant-friendly gross-type leases. For tenants that need stability in occupancy, the "space-as-a-service" model might not be cost effective, but in today's environment, tenants also want more predictability in their occupancy costs.

The reason that landlords moved towards net leases is to have tenants take on the risk of changes in operating costs at their building. Across large portfolios, though, owners have realized that those risks tend to cancel out -- an expensive year in Kansas City gets canceled out by a lower-than-projected cost year in Tampa. As such, some are now offering variants of a gross lease where tenants get a set occupancy cost.

As of the latter part of 2019, the norm is still for landlords to offer net leases or some other variant where risk gets shifted to tenants. However, as clear leases and space-as-a-service continue to gain popularity, a future where landlords take more risk and tenants get more predictability in their occupancy costs is coming.