FLEX APPEAL

Companies Realize Economic Advantage to Turnkey Business Centers

By Amanda Marsh

When Michelle Darden Lee's Washington, D.C.-based public relations firm grew too big for her home office's britches, she needed to find affordable space. "When you're the sole proprietor, cash flow is everything," she said.

At the time, leasing space, hiring administrative support and tailoring the space's infrastructure to the company's needs were not within her means. Instead, she turned to Synergy Workplaces, a provider of turnkey office space in business centers.
Within five days, Mingus Communications was up and running only two blocks from the White House. In an office market that easily commands more than $40 per square foot for traditional leasing, Synergy made sense for her company. "They totally support our business model," Lee said. "We couldn't do it on our own."

Though called "business centers," the facilities range in size from a single floor to an entire office building. The leasing specialists then provide turnkey office space within the business centers to clients ranging from startup companies to seasoned businesses looking for temporary space and have anywhere from a single employee to an entire staff.

Offices are ready for immediate move-in, with furniture, computers and office machines in place. The management firms also provide services a typical client would need for operation, and, based on needs, may include a receptionist, a phone support system, meeting rooms, Internet connectivity and a mailroom. "For ticky things, like changing light bulbs, someone is there," said Susan Cauthen, vice president of operations in the United States for Interactive Worldwide.

But unlike with traditional subleasing, clients are provided with full-service secretarial, technological and operational support for a monthly pre-fixed or a la carte price. And a client does not have to hire the extra administrative assistant or manager or even a short-term temporary worker, which saves the company training time and money.

Other clients take part in a virtual office setting, where they do not need office space but still need someone to sort their mail and answer telephone calls. It also allows home businesses to have an address and phone number at an office building, instead of having to use home addresses or P.O. boxes. If the need for a meeting room arises, they can rent time in a business center.

Dollars & Sense

The move-in, full-service flexibility that these centers offer has sent their popularity soaring over the past three years. "The line between direct space and flex space has become blurry," said Laura Kozelouzek, president of Synergy. "Many people are seeing what business centers have to offer."

"There's an economic advantage," said Guillermo Rotman, president of The Regus Group Network of the Americas. He explained that markets may change, and such flexibility allows clients to move quickly from, say, Atlanta to Miami without worrying about subleasing the rest of their commitment.

"I don't even have to explain the concept to people anymore," Cauthen said. "Fifteen years ago, they wouldn't have understood." Jay Baughman, president of Office Suites PLUS, agreed. "Now the clients come to us knowing what they want."

This office solution began to pique interest in the mid-1990s, after the dot-com bust, as clients began to see the financial flexibility such spaces offered. "They realized the (effect) of long-term commitment in a short-term business cycle," said Joseph Wallace, a senior managing director for CB Richard Ellis Inc.

Larger real estate players and institutional investors then hopped on the bandwagon, bringing the mom-and-pop operations more recognition, Kozelouzek said. "It's a great business and an important niche," Wallace added.
CB Richard Ellis was one such real estate player selected to be the national provider for Regus, helping find space for its centers and assisting the company in its lease transactions. Regus, in turn, refers clients to CB Richard Ellis that ultimately opt for long-term lease space.

But overall, it seems the most important factor is the cost of such services. "There's a popular phrase used in this industry- 'nickel and dimed,''' Baughman said, describing business center operators that charge for services a la carte, from copy machine use to hours spent in a conference room. Many companies have switched to a pre-fixed price, which is more attractive to clients. "Everything's Included. ... It makes it simpler for (both) the manager and client.

And that was exactly The phrase Lee used to describe her quest for space in a business center: “Some companies nickel-and-dime you to death,: she said, with fees from extra copies to long distance adding up. “(Synergy’s) package deal was a godsend to me.” For instance, the company provides 2,000 phone minutes, 400 copies, 25 faxes and eight hours of conference room time per month in one inclusive price.

Evolving Needs

To survive in such a competitive industry, providers have offer new services as clients
demand change. Kozelouzek discovered that Synergy's clients were looking for more of a "work-life balance," she said. "We felt it was lacking, and we wanted to take it an extra step." The company's solution was to create a fun yet productive atmosphere for its clients. It includes a dot.calm room - a more informal meeting room complete with comfortable love seats, aromatherapy, a waterfall, client lounges, healthy vending machines and televisions. It also offers clients a perks program, which includes activities like movie nights, monthly wine tasting, massages and manicurists.

Client demands have also begun to go beyond facilities management. "Their level of expectations are higher. ... They value their time," Cauthen said, adding jokingly, "They want us to pick up their dry cleaning."

And yet, quite seriously, many companies are now beginning to offer that very option. Synergy includes two hours of personal service-whether ordering a client's lunch, organizing his office or confirming appointments-into its pay one-price package. At Interactive Worldwide, clients contract time for an extra fee.

Baughman, on the other hand, finds that his clients look more toward the image and flexibility that business centers have to offer than toward the personalized service. His company brought in dry-cleaning and shoe shining services, but they were not popular. Rotman found that Regus' clients are willing to do such things on their own, and its centers are located near amenities like dry cleaners.

Kozelouzek projected that most buildings will eventually have business centers, as it would be an easier move for tenants that need to build out or be incubated in a market before committing to a long-term lease. She also sees a future in medical offices investing in such flexible space. She noted that many doctors do not like to run the business side of their practice, so a business center would make sense.

Markets Matter

Most of these business centers reside in dense, metropolitan markets like New York City, Chicago, Boston and Washington, D.C., but market conditions dictate whether or not the centers will thrive there.
For instance, Jonathan Kingsley, a managing director & executive vice president for Grubb & Ellis Co., found that prospective tenants in South Florida have great confidence in taking space through traditional leasing. Landlords are also more apt to lean toward traditional space.

"The cost to build or retrofit buildings into business centers is more expensive," he said. "Why spend more money for a what-if, when you can spend less on a guaranteed tenant?" Other concerns for landlords that are leasing flex space include such "management nightmares" as skewed parking ratios and chasing down clients regarding postleasing issues, including damages. "They'd rather chase a corporation that has securitization."

Kingsley also said that in many situations an a la carte management menu might prove more expensive than traditional leasing and management hiring. "The trade-off for flexibility is that you may end up with more space than you need, or you may not fully utilize all of the services.: He said it may just be a dynamic in South Florida, but many of the smaller business center management companies in the area have folded due to market conditions. Other clients, like Lee, are able to find affordable prime space in not-so-affordable markets.

But most remain bullish on the future of business centers. "There will always be a need for such space," Baughman said. "We're looking to expand to more sites. ... All of our markets are improving and have been increasing across the board.