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Reprint of Wall Street Journal Article from Apr 25, 2001
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Commercial Real Estate

Short-Term Suites Gain Interest
As Firms Rationalize Space Needs

By MOTOKO RICH
Staff Reporter of THE WALL STREET JOURNAL

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 move-in.

"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 technology clients.

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."

Copyright 2001 Dow Jones & Company, Inc. All Rights Reserved.  

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