[roel_v]

"We might not be around in 6 months!"

What kind of premium were you prepared to pay for this risk to the owner? If your answer is <10%, or even <50% depending on the actual amounts we're talking here, do you find it irrational that you had trouble finding an office?

[tmwatson100]

Hi roel_v,

In our experience we have found that there ARE spaces available for companies such as Chris' that have little idea of where they will be in 6 months time. At the end of the day, startups and becoming more and more commonplace and the demand for space with contract flexibility is going up with it. It is up to landlords and operators of space to decide how they react to this. They can either ignore it, leave the space open until their find their 5 yr client. Or they can attach a slight premium to the space and rent it for a more flexible term.

In general, we have found that space operators and landlords and increasingly accommodating for this and are attaching a risk premium. It may not be as high as 40% but there is something there. They achieve this by paying rent on a sq ft basis, but letting out the space on a per desk basis. If you do the maths, you can achieve a relatively attractive spread assuming x% occupancy.

We believe that Spacious can help liquidity in the market by making landlords and space operators confident that if they react to shorter contract lengths, they won't have to worry about long periods of vacancy as a potential tenant would be able to find them easily.

[roel_v]

Sure, as a 'co-working' concept, it exists. So maybe the GP was referring to that, but then again (while I don't know the specific market in London), there is plenty of supply in that market in every big Western city I know a bit about, so I assume the same for London. Then again you pay 100% premium on those spaces.

What I was reacting to is what I hear relatively often - 'hey my house/room rent is X / m2, why can't I find an office for that price? It's just me and my buddy and we're broke and most likely out of business in 6 months, why don't landlords love us?'.

"We believe that Spacious can help liquidity in the market by making landlords and space operators confident that if they react to shorter contract lengths, they won't have to worry about long periods of vacancy as a potential tenant would be able to find them easily."

It's not clear to me what you're doing any more, since you seem to contradict yourself. Are you about making landlords turn themselves into coworking spaces, or do you have some way to guaranteeing a higher occupancy rate for owners, or are you just Craigslist for office space, like there are a zillion others? What's your added value? The coworking space is so crowded, I don't see any savvy owners who are not in dire straits dive into that market any more in 2014. There is vast oversupply (at least at price levels that make it profitable) in the (admittedly small, niche and out of the way) markets I know about. Those who tried it find out very soon that the small hidden costs add up very quickly, and that it's a completely different kind of business from 'just' renting out property (and a business most don't want to be in).

[tmwatson100]

"What I was reacting to is what I hear relatively often - 'hey my house/room rent is X / m2, why can't I find an office for that price? It's just me and my buddy and we're broke and most likely out of business in 6 months, why don't landlords love us?'." - absolutely, I agree completely with you on that. If you can't afford it, you can't afford it.

We're not at all about making landlords turn themselves into co-working spaces.

We want to make renting office space easy.

At it's most basic distillation this means "search and transact" - matching supply and demand as best as possible. We believe this is broken due to assumed knowledge, market fragmentation and asymmetric information as mentioned in the blog post itself.

This not only improves the experience for companies looking for space, but allows those who own space to be discovered a a lot quicker. The very fact that zillions of craigslist clones already exist goes to show that this problem just has not been solved yet.

What we mean by Spacious helping liquidity is a derivative of search and matching supply with demand. If you are confident that you will be able to find a tenant quickly because there is a platform that exists to effectively match supply and demand, then you may have slightly less hesitancy in letting out your space to someone for <1yr.

Of course, I absolutely agree that common sense, and a typical risk / reward scenario means that you will always want to lock in a tenant for as long a lease as possible. This tenant would ideally have great covenants and >5yrs of financial history.

The point I was referring to in my initial response was to the no. of companies now springing up that need <1yr leases because of uncertainty and how a space owner may benefit from that... whether this is from co-working or subletting if you are already a tenant.

Your insight is very much appreciated and I really do enjoy discussion around this!

[roel_v]

But then what value are you adding over Craigslist? You are basically a list of offices for rent, and owners put their space on your website, and maybe you crawl other sites to seed your offerings, too?

In most areas there are sites that are set up by real estate brokers. Their agents or licencees or franchisers or whatever input all properties in their central system and they all end up on that brokers website, and submitted to big sites as well. Is your schtick to squeeze out this middle man? To offer a platform to people who don't use agents? If so, how are you making money? Do people pay to list their properties, or do people finding properties pay you?

Look, not to be shitty about it, but you said e.g. this:

"We believe that Spacious can help liquidity in the market by making landlords and space operators confident that if they react to shorter contract lengths, they won't have to worry about long periods of vacancy as a potential tenant would be able to find them easily."

I see no other way to interpret this is 'we list your properties on our website so don't worry about losing 3-4-5 months of rent on a short term contract because we can find another one like that very fast'. Actually I didn't understand it like that at all when I had only read the OP, but the more you explain, the more I get the feeling this is it. What makes your site find tenants faster than other sites?

[mattmanser]

What risk?

That they'll have to pay advertising again?

Because if you don't move in, it's still empty.

[roel_v]

This post just shows that you have never let out any real estate. Let me tell you, it's not as simple as this.

It's not just the 50$ or whatever to put up one online ad. You need to advertise on several websites plus offline. You need to show around various candidates, and do background checks on the serious ones. You have to transfer utilities, deal with mail, and other assorted tasks when somebody moves in. All of this for (in terms of yield) slim margins. And assuming that nothing is damaged or needs fixing up after somebody moves out.

Now, for commercial space it gets worse. When they go out of business, it's highly unlikely that you will recover the owed rent - likely several (2-3) months. Commercial real estate is vacant for longer, and having a tenant 'in between' basically 'resets' the cycle of getting a new tenant. (businesses take a few weeks to months before deciding, residential is usually faster, i.e. faster turnover)

Also, businesses usually make changes when they move in, not always for the better (network rewiring, dividing space etc for offices - for storefront it's much worse still). If they go bankrupt, you as the owner are stuck with the cost of repairing. The deposit (a paltry 2 or 3 months rent) is usually not sufficient.

Again, all of this is assuming that there are no 'real' troubles - no lawyers involved, no 'real' renovations needed after they move out, ... Just the cost of getting somebody to dispose of an abandoned office full of furniture costs a month rent, because second-hand office furniture isn't worth anything!

For me, I don't bother with terms of < 6 months for rentals, not even for a 100% premium (residential that is, I don't do commercial). And 1-year leases I only take as a 'probation' period, if it's clear from the beginning that they have no or little intention on staying longer, I won't accept such a candidate. Financially it just doesn't make any sense, and I'm not even counting the stress and the hassle.

[mattmanser]

For me, I don't bother with terms of < 6 months for rentals...I don't do commercial

Well there you go. The standard in residential is 6 months - year, so what are you talking about?

It sounds like someone trashed your residential house and you're personally angry about it.

Being screwed over is a risk of doing any business and you can't take it personally. Some people will screw you over, not pay invoices, bills, etc.

You can't base all your future dealings off that one event.

[roel_v]

What? How can that be what you take away from my post? I don't know what geographic area you know about and if 6 months to a year are anything but exceptions there, but my whole point was that short term (< 1 year) rentals don't make financial sense, unless you put a big premium on it. The premium would be 100% or so (as I said, for others, who can be bothered, which I can't), whereas the discount for >5 years is 0, or 5% at best.

Nobody trashed any of my properties, and the disputes I had were settled in my favor by the courts. I'm a lawyer, I can take care of myself. My point wasn't about me - it was about illustrating that short term rentals don't make financial sense at the rates people expect, and that most prospective tenants don't see that. Everybody thinks that real estate is easy money, but it's very competitive, the margins are slim and one decision on who to rent to can make or break your ROI for that year.

[tmwatson100]

Hi Matt,

Completely agree. At the end of the day markets depend upon supply and demand forces. The economic landscape looks much different to what it did 10 years ago. Smaller companies that need contract flexibility are springing up everywhere, and the demand for flexible space is increasing. There's only so long this can be ignored by those operating or owning commercial space.

[mkohlmyr]

Assuming no-one else wants the space.

If no-one was interested in or willing to sign a 3 year contract they wouldn't be able demand it.

[tmwatson100]

Absolutely agree. There are still plenty of companies out there who have the relevant covenants and ability to sign that 3 year lease.

However, as the economy evolves and high growth companies companies become the norm the number of people willing to commit to a 3 year lease will start diminishing. This not just because they are not able to forecast their financials, but they are not able to forecast their staff numbers either.

It's an interesting time for commercial property and it'll be intriguing to see how this plays out.