Is This a New Era of Office Rent Based on Occupancy and Utilization?

Workplace flexibility is still a top priority, and this has of course dramatically shifted the way we work. It’s no secret that the demand for commercial office space has taken a hit as a result.

With many companies adopting Work-From-Home policies, the need for physical office spaces has significantly reduced, and landlords are finding it increasingly challenging to fill their properties. In response, landlords are becoming more creative and offering increasingly competitive incentives to lure in commercial tenants. Read on to learn why this may end up in a win-win for everyone involved.

Landlords are Becoming More Competitive

Since businesses continue to offer remote or hybrid-friendly work environments, they have witnessed dramatic nosedives in the utilization of their corporate spaces. To stay afloat, commercial property owners have no choice but to be flexible with their tenants as the future of corporate spaces remain in flux.

Landlords have come to terms with the Office Apocalypse. Some are handing the keys back to the bank, others are considering converting their property types, but the vast majority are trying to get more competitive. And this new era demands a little creative adapting.

New York City real estate developer, Rubenstein and Partners, is trying something new. In order to lure in forward-thinking, industrious companies, they are willing to offer up to a 50% discount on base rent and more flexible terms than typical leases. The particular building, 25 Kent Ave. in Williamsburg, sits mostly unoccupied with 65% of the property’s square footage yet to be leased.

25 Kent Ave. in Williamsburg, Business Insider

Rubenstein and partners are prepared to offer three 8,000 – 10,000 square foot spaces on their third floor for $30 per square foot. For reference, the signed tenants in the building paid an average of $70 per square foot. Not a shabby discount.

And while the lease square footage may seem small, it reflects a new demand for streamlined portfolios without extraneous fat. So, what’s the catch? Is there such thing as a free lunch?

Rent Based on Occupancy

In an unprecedented move, rent in the building will be according to how many employees use the space.

How will this work? Rubenstein said it would track office attendance based on employee ID card swipes. If occupancy reaches 60%, this triggers market rent charges to be applied rather than the hefty discount.

Building reps believe that this new strategy holds promise. Forward-thinking companies that want to retain some degree of corporate spaces may be willing to work with their landlord in a way that has yet to be fully developed.

New approaches to commercial leases are becoming increasingly popular among landlords. This particular example would, in theory, allow them to entice tenants with low rents while protecting their financial interests. The flexibility of this model means that tenants can rent the space they need, without being burdened by high rents, and landlords can generate additional revenue if the tenant decides to increase their office occupancy.

The concerns of leases outlined ten years ago are not the same ones tenants are worried about today- cut and dry. New strategies are demanded for new types of compromises. The remote work phenomenon has fundamentally shifted the way we view the workplace. Accordingly, we need to develop new standards that satisfy both traditional and novel work preferences. And this is all well-and-good until the country’s leading landlord conglomerates are defaulting on their loans and handing keys back to the bank. It’s leading a runaway train far beyond the path of a nasty recession.

So, there is a delicate balance in this cycle between appeasing commercial tenants while ensuring landlords can remain afloat in a new hybrid-heavy work environment.

The Benefits of Occupancy-Based Rents

For tenants, this pricing model provides flexibility and cost-effectiveness. This can be especially useful for businesses with varying needs for office space, such as those experiencing growth or seasonal fluctuations. Additionally, this pricing model can incentivize tenants to optimize their use of space, which can increase productivity and reduce waste.

This strategy also benefits tenants who are unsure about the long-term prospects of their business. With the uncertainty caused by the pandemic, many companies are hesitant to sign long-term leases, because they aren’t sure about the role of corporate space going forward. Rent based on occupancy will also allow building owners to forecast out their need for space in the future based on utilization metrics learned from card swipes.

In the meantime, this model offers them the flexibility to maintain an office, no matter how vacant, without it creating a significant hemorrhage on your EBITDA.

For landlords, charging based on occupancy can increase revenue and improve tenant retention by offering a more attractive pricing structure. It also provides an incentive for tenants to use space efficiently, which can help landlords better manage and maintain their properties. Overall, a pricing model based on occupancy can create a win-win situation for both tenants and landlords in the commercial office market.

Other Landlord Concessions on the Rise

In addition to offering flexible rents, landlords are also exploring other ways to make their properties more attractive to potential tenants. Some are investing in building upgrades, such as modernized lobbies, better ventilation, and more outdoor spaces, to create a healthier and more productive work environment. Others are offering amenities such as communal meeting spaces, shared kitchens, and fitness centers, which can help tenants attract and retain employees.

Rubenstein’s competitive rent slash is reminiscent of other unprecedented moves by landlords in the last few months. Beginning with landlords in Manhattan, a wave of property owners began to cover soft costs in Tenant Improvement Allowances.

“New York City landlords started including furniture cost into the tenant improvement allowances just to get people in the building. What was intended to be a short-term solution to assuage a transitory market started to become the norm.”

Perhaps, not so coincidentally, the office market in New York s finally leveling out. January of 2023 was the best performing month since December of 2019.

The success of landlords luring in tenants with soft costs was observed by others throughout the country, inspiring a firestorm of similar moves. Tenant Improvement Allowances skyrocketed across the country.

So, since New York’s moves have a precedent of catching on, and if the occupancy-based rent method is successful, we may be seeing it a lot more often in the upcoming years.

Corporate Tenants' Power to Negotiate

The office market is back- but in new ways. Both commercial tenants and landlords must be prepared to adapt their negotiations to a new world of office occupancy. What is certain though is that it’s never been easier for commercial tenants to receive great deals for their commercial leases.

Whether this means flexible terms, low rents, higher TI allowances or other concessions, commercial tenants are in an excellent position to negotiate. Landlords are now becoming more creative to lure in commercial tenants as a result of the low demand for office space. They are adapting to the changing needs of tenants in a post-pandemic world. It is likely that landlords will continue to explore new strategies to make their properties more appealing and attract tenants.

So as a tenant, you have incredible leverage to fully optimize your properties while getting the best leases possible. But don’t let this rare opportunity to slash your overhead costs go to waste. In order to get the most out of your negotiation, you need to have an expert by your side. And what better expert than a True Tenant Representative™? At iOptimize Realty® we are True Tenant Representatives™ who only represent the interests of commercial tenants, never landlords. With 30+ years of market intelligence and negotiation prowess, we have helped our corporate clients take up to 30% off their CRE transactions. Let us help you take advantage of your power as a tenant.