As Firms Rationalize Space Needs
By MOTOKO RICH
Staff Reporter of THE
Not so long ago, companies were scrambling to sign leases on as much
space for as long as possible -- a hedge against escalating rents and
dwindling square feet.
No longer. With falling profits and layoffs roiling corporate
America, many tenants are sitting on too much space, and looking for
ways to get rid of it.
But one segment of the real-estate industry is hoping that companies
will learn a lesson from the frenzy of the past few years. So-called
flexible-office providers, who allow tenants to rent workstations rather
than offices and lease space for months rather than years, believe
companies will start moving a larger proportion of their real-estate
portfolios into temporary space, in part because that will help them
better manage economic downturns.
"There are a lot of companies that are sitting on a lot of space
[they don't need]," says Jim Howland, chief executive of the
Americas at Regus
PLC, based in Chertsey, United Kingdom. "If they had been sitting
on flexible space, they could have downsized quickly."
Moreover, during a downturn, companies that still need some space are
reluctant to make long-term commitments and will prefer the short-term
nature of flexible office suites. "Uncertainty makes people have a
hard time making decisions," says Paul Ginocchio, an analyst who
follows Regus in London for Deutsche Bank. "They don't want to be
the one making the decision to lock themselves into something long term
when two weeks later they learn they have to cut everything. So that
makes [flexible-office space] a smart choice."
Regus's Mr. Howland predicts that corporate tenants, which have about
2% of their real-estate portfolios in flexible space, will eventually
move toward putting about 20% of their real estate into shorter-term
leases. Likewise, Scott Rechler, chief executive of Frontline Capital
Group, a New York-based owner of HQ Global Workplaces Inc., which along
with Regus dominates the flexible-office-space market, says that within
the next decade, corporate tenants will sign as much as 25% of their
real-estate leases on short-term commitments. Anticipating such needs
among their customers, Chicago-based Equity Office Properties Trust ,
the nation's largest office owner, in January launched FastOffices, a
new line of suites for tenants that need furnished and equipped space in
a hurry. So far, the company, which plans to build 30 of these offices
-- each only about 2,100 square feet -- has finished 22 and fully leased
12 of them.
Both Regus and HQ have been quietly expanding their businesses and
signing up blue-chip tenants such as Exxon Mobil Corp., Charles Schwab
Corp. and 3Com Corp. More than providing just raw real estate, these
companies fit out the offices with furniture, Internet connections and
copy machines. They also provide various services such as receptionists
and catering. Unlike more local, niche firms like TechSpace LLC, eEmerge
or KickStart, all founded primarily to cater to start-up companies,
Regus and HQ are aimed at larger corporate tenants who might need a
small office in a new market.
Global Crossing Ltd., the telecommunications-network builder, has
contracts in about 10 Regus centers because of "the convenience of
being able to send people to an office and have it immediately open for
business," says Scott Sabbagh, senior vice president of real
estate. Negotiations for longer-term leases often take months. Mr.
Sabbagh says the company, which currently has just under 5% of its real
estate in flexible-office suites, plans to increase that proportion to
as much as 10% over time.
Regus, which went public on the London Stock Exchange and the Nasdaq
Stock Market in October, was founded in 1989 with one center in Brussels
and now has 350 centers, or 66,000 workstations, world-wide. In the
U.S., the company launched its service in 1998 in San Mateo, Calif., and
now has 70 centers and about 17,500 workstations in 29 cities.
Meanwhile, HQ, which started with seven centers in 1997, has grown
through acquisition and new offices, and operates more than 450 centers
globally, more than 370 of which are in the U.S.
Still, challenges remain. Meade Boutwell, senior director at
real-estate-services firm Cushman & Wakefield in San Francisco, says
the flexible-office companies are competing directly with sub-lease
space from shrinking technology firms or space that landlords have taken
back altogether from bankrupt start-ups. Often, this space is already
fitted out with furniture and Internet hook-ups, ready for immediate
"It's like the only thing you need to bring is your business
cards because they have pencils in the desk and paper in the copy
machine already," Mr. Boutwell says.
Due in part to uncertainty about the U.S. market, Regus's American
depositary shares fell 28% from the beginning of March to the beginning
of April. Monday, in 4 p.m. Nasdaq Stock Market trading, Regus was down
$2.25 to $19.50, just 3.8% above the IPO offering price for its American
depositary shares of $18.79. Yesterday Frontline's shares were up seven
cents to $8.80, down 65% from its 52-week high in July. "Deals just
aren't getting signed, and it could be that that is affecting the
temporary-suite business as well," says John Lutzius, senior
analyst at Green Street Advisors Inc.
Indeed, Mr. Rechler says that due to the technology fallout, HQ has
suffered as some of its high-tech tenants, as well as service companies
affiliated with the technology industry, have closed up shop or canceled
their contracts with HQ. HQ, which said at the end of the fourth quarter
that occupancy was about 85%, guided analysts toward lower occupancy
levels for the first quarter. Mr. Rechler declines to comment. He says,
though, that sales to traditional corporate customers have been ahead of
expectations and have, to some extent, made up for the loss of
Regus says inquiries in the first quarter are double what they were
in the fourth quarter 2000, and that it expects to meet consensus
analysts expectations of 0.74 pence (1.1 cents) compared with earnings
of 0.9 pence per share in the fourth quarter. A Regus spokesman says the
first-quarter figure is being affected by the company's rapid expansion.
Longer term, some corporate clients are looking to downsize their
flexible-office needs as well. 3Com, Santa Clara, Calif., which has
contracts with HQ and others in more than 50 centers around the country,
says it hopes to reduce its reliance on such centers by 50%. Roger van
Overbeek, real-estate manager for the Americas, says the company is
trying to shift many workers to home offices.
Still, as companies look to adapt their real estate to changes in the
workplace, says Peter Holland, senior vice president with responsibility
for real estate at Hartford Financial Services Group Inc., corporate
tenants are increasingly looking for flexibility and cost savings. After
all, says Mr. Holland, "the most expensive square foot is the
square foot you're paying for that you don't need."