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4 Types of Office Lease: Traditional, Serviced Office, Coworking Space, Enterprise Solutions

Updated: Nov 9, 2021




Do you want to compare the different lease options available in the market and see which one best suits your business needs?



Let me define to you the following kinds --specifically for the Philippine market-- and let us enumerate the pros and cons of each so we can identify which one would be best for your operations.











Traditional Office


The traditional office is the classic arrangement where you find a space in a building that is for lease, you agree on commercial terms with the landlord, you sign a contract, you fit it out according to your preference or business branding, and you occupy it up to the end of your agreed lease term. The traditional office usually has a longer minimum lease term requirement--in the Philippines, Grade A offices usually require a minimum guaranteed contract of 3 to 5-year lease.

Pros:


  1. Exclusivity - Naturally, having your own space means you enjoy the exclusive use of it. This is what you will need to sacrifice if you opt for a serviced office or a coworking space. Sometimes though this cannot be sacrificed by some companies such as financial institutions, MNCs, tech companies, and top conglomerates who have strict protocols when it comes to their data privacy and security.

  2. Branding - When you get your traditional office, you will have the freedom to brand it accordingly to your preference or to your company's branding guidelines.

  3. Cost - When you look at it at a longer scope, getting a traditional office still makes the most financial sense as you are directly paying the landlord. To compare with serviced offices and coworking spaces, there is always the added service cost which is of course the essence of their business.


Cons:


  1. CAPEX cost - On the front end of your cash flow, a traditional office in the Philippines will require you to capitalize for fit-out construction, advance rents, and deposits. This may not be an attractive option for some locators especially if their growth is still hard to predict. Spending millions in construction costs may go to waste if you will suddenly need a bigger space to relocate your entire operations in the middle of your lease term or worse, earlier than that. On top of that, pre-terminating your lease may also translate to forfeiture of your advance rents and deposits.

  2. Maintenance & Upkeep - In your own exclusive office, the responsibility of maintaining your space and the assets such as your furniture, equipment, etc. is solely yours. Thus, you will need to hire or outsource personnel to do this for you and the bottom line is, you still need to manage them or direct them. Compared to a serviced office or a coworking space, this is automatically taken care of by the operator.

  3. Flexibility - If you are a company that grows consistently and/or has the potential to downsize suddenly, a traditional space may not be flexible to pace with this type of operation. Once you sign that lease contract, you are tied to that space up to the end of the agreed lease term. Relocating, expanding or downsizing in the middle of your lease term may mean asking your landlord for a pre-termination so you can find a better space that can accommodate your business needs. And of course, as mentioned earlier pre-terminating will incur penalties on your end and your fit-out costs which you have capitalized on will essentially be wasted once you transfer and leave that space.


Serviced Office


A serviced office is a type of office that is fully equipped and ready to occupy. It is usually managed by a third-party operator (apart from the owner or landlord of the space) who leases the traditional space and is the one to capitalize and spend on the fit-out and furniture needed for an office so that they can sublease it for a profit. In the Philippines, you can get a serviced office for as short as a month.

Pros:

  1. Flexibility - Sometimes referred to as "flexible space", serviced offices are the best choice for companies that have a lot of movement when it comes to their real estate need. This is most suitable for freelancers who move a lot and as previously discussed, companies who have unpredicted growth or those that have the potential to downsize their operations in a short period of time. Locating in a serviced office would be ideal as this would mitigate the risk of being tied up to long contracts and a costly CAPEX.

  2. Low CAPEX - To reiterate on the CAPEX, choosing to be in a serviced office is cost-effective on a short-term basis as you will not be capitalizing on the construction of your office space and advance rents and deposits will be at the very minimum cost.

  3. Start Right A Way - If you want to be more productive and you just want to get on with your business and operations, a serviced office is a good option as you will be avoiding the entire process of building the office from scratch (depending on how big your office is, it can be 3 months minimum in the Philippines--and that is not even including the procurement of your vendors such as your designer and construction team).

  4. Office Management - Serviced office costs are not just the furniture, the equipment, or the construction--it's actually the added service of the management of your space--administrative costs, cleaning costs, maintenance costs and utility costs, and other office real estate related costs. Being in a serviced office basically means you are outsourcing a lot of services to the operator and that includes the management of your office which if you do in-house will translate to fixed employment costs and still, actual management on your end.

Cons:

  1. Reduced Privacy - Unless you are the sole occupier of a specific serviced office, there will be a risk of reduced privacy to your company as you will be sharing your space with other tenants. This means that you are sharing spaces such as the pantry, the office lounge, meeting rooms, and even equipment such as the printer and the copier.

  2. Expensive in the Long Term - If you can predict the real estate need of your company within a 3 to 5-year range, it would be best to do so. If you get stuck in a serviced office for more than a year or two, the cost difference of being in your own space is significantly high.

  3. Lack of Branding - When you get your serviced office, you won't be able to change its design unless coincidently and conveniently, it matches your preference or your company's branding guidelines. Most serviced offices will only allow you to put your logo on your door. The good thing though is they usually implement a neutral design to balance the branding of their tenants.

Coworking Space


When we say coworking space in the Philippines, it's similar to a serviced office in a way only that it's in an open space instead of your own private office with closed doors. Imagine a big coffee shop minus the coffee bar, yes, thats a coworking space.


Pros:

  1. Flexibility - Similar to a serviced office, you can lease or be a member of a coworking space for a month's contract. Some operators also have multiple sites in a city or country where they give you access to all sites giving you the most flexible option among others.

  2. Cost-Efficient - Since you won't be having a dedicated space that you can work on privately, this makes it the most affordable option on a short-term basis. Of course, what you see is what you pay for. You will be missing the dedicated bandwidth, dedicated phone lines, and a dedicated desk. Again, you're like walking in a coffee shop minus the coffee bar. Also, again, you won't need to capitalize on any of your real estate needs--rent-wise and construction-wise. Just pay your monthly fees and you're good to go. Some coworking spaces even accept daily reservations.

  3. Networking Opportunities - Most tenants in coworking spaces are actually start-ups or new companies who are still testing the waters and ideally, they don't want to spend so much on real estate as they want to simply focus on jumpstarting their business. Thus, if you put them in one space, collaboration is bound to happen. This is the magic of coworking spaces.

  4. Office Management - Similar to serviced offices, coworking space means you don't need to hire personnel to maintain your space or your office. You won't be needing a receptionist, a cleaner, a facilities manager, as these are essentially already part of the features of your coworking space.

Cons:

  1. No Privacy - Coworking spaces are designed to be open to house more people and as mentioned above, to promote networking or collaboration. Thus, if you are looking to work privately, a coworking space might not be the best option for you. Especially if you are running a company that deals with sensitive information or data.

  2. Distractions - Given that you will not be having closed doors, there will be a potential number of distractions you will encounter in a coworking space.

  3. Company Culture Differences - Although it is possible to work harmoniously together in one space with other people from other companies, there are still gonna be instances where there will be a clash of company cultures. What you can do is either you live with it even if you don't like it or change your workplace --which obviously are both unpleasant working experiences.

  4. Lack of Branding - Coworking spaces usually can't provide branding opportunities for their tenants unless they are getting the entire space. Again, the concept of coworking is you don't really have a dedicated space as it's a "shared" space and that obviously means, you can't brand what's not entirely yours.

  5. Expensive for long-term leases - Maybe it is less expensive compared to a serviced office but to compare with traditional offices, coworking space will still cost you more in the long run. Thus, again, if you can project your real estate needs and you can really make a concrete business plan, a traditional space will still be financially the soundest option.

Enterprise Solutions


Enterprise solutions in the Philippines is still new and there are only a few providers as of to date. What it means basically is to have a third-party expert build you an office that is tailor-fit to your needs, is exclusive to your company, and is turned over as a serviced office. It's a hybrid of getting a traditional space but having a company of expertise build it for you and manage it for you. This solution is pitched mainly to clients who are looking to have their own office but need to outsource the entire process of setting it up for them and managing it as well. This is also perfect for those who do not want to capitalize on their office setup.


Pros:

  1. No Fixed Employment Costs - Also same as with the benefit of being in a serviced office and a coworking space, opting for Enterprise Solutions helps you avoid employment commitment for the building and managing of your office space.

  2. Expertise - When you outsource these functions, naturally they are experts in their field and the margin of error is greatly reduced when it comes to building and managing your space.

  3. No more micromanagement - When you hire outside of your company to build your office and manage it for you, you can expect that the micromanagement of tasks will be on their shoulders now and that they are expected to function and report to you their progress and give objective recommendations when you need to make decisions rather than having you direct their every move.

  4. Low CAPEX - Although the CAPEX can vary, the usual case is they will amortize all related costs to the building and managing of your space on a monthly basis. How the CAPEX can vary is depending on whats the agreed advance rent and deposit. So instead of paying an upfront construction cost, they divide this cost and spread this on your agreed lease term.

  5. Exclusivity and Branding - Similar to a traditional office but not to a serviced office or a coworking space, enterprise solutions gives you your own exclusive space which you can brand accordingly.

Cons:

  1. Still Expensive - If again, we compare to a traditional office, enterprise solutions will still cost you a significant difference as any outsourced job will. The question is really if the value of the service added is worth it or not and will the saved time of outsourcing outweigh the benefits of the saved cost of doing it in-house. That really is up to you to quantify and decide.

  2. The Space is Not Yours - Since you are amortizing everything to the operator, the lease and the assets in the office will be under the operator's entity. Not really a downside as this is essentially just for the operator to protect their end but some would still want to have the lease and assets under their company name especially if they are very traditional with their financial statements.


CONCLUSION
At the end of the day, businesses or companies are different in so many ways. Knowing which type of office works best for your operations is crucial as it can pave the way to its success. Thus, investing in your workplace is a must. Before making a decision, make sure that you have done your research or you have consulted with a CRE professional who can help you identify your needs.

If you want to get availabilities of office spaces for all types of lease discussed, just send in your requirement to us and prepare you a presentation.

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Office Pro Philippines is a Corporate Real Estate Consultancy and Service Solutions firm that is focused on the OFFICE SPACE.

We are the only OFFICE SPACE-FOCUSED real estate in the Philippines with more than 10 years of practice from our consultants.

Our core services include office consultancy, office lease acquisition, office construction management, and office facilities management.

To know more of our services, you can send as an inquiry through the button below.





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