In today’s post-pandemic era, tenants are looking to landlords for more flexibility when committing to office space. One creative approach landlords are taking to fill vacant space and renew leases is by agreeing to a phased occupancy plan.
What is phased occupancy?
Phased occupancy is a flexible growth strategy allowing a business to occupy and pay for only a portion of their overall square footage while gradually growing into the space. This typically happens over a period of one to three years before a business is both fully occupying and paying on their full square footage.
This strategy has been ideal for rapidly growing businesses who anticipate high company and employee growth over a short period of time. It allows tenants the flexibility to expand into their space while not having to pay on the square footage that they do not yet need.
Advantages of phased occupancy
There are a few different approaches to a phased occupancy plan, but the most common and tenant-friendly provides the tenant full access to the entire space up front. Although the tenant has full access, they still can grow into the space over time and only pay on the portion of square footage they are utilizing at the present.
There are several benefits to this approach. Taking all the space up front means the tenant has access to the full tenant improvement allowance up front as well. Additionally, the tenant does not have to deal with the hassle and complexities of a phased buildout construction process.
Another method of the phased occupancy approach involves only having access to and paying on the space the company occupies. Over time, the company would build out and occupy more space. Here the tenant improvement money would be phased as well.
Overall, both approaches will save the client money by paying less rent. Additionally, both provide the tenant the opportunity and advantage of not having to produce as much up-front capital to furnish the entire space as soon as the lease is signed.
Phased occupancy today
The last year has been tumultuous for both the world and the real estate industry. The onset of the pandemic led to a sharp incline in remote work and a significant decline in office space demand. A year after the onset of the pandemic, many would anticipate that this shift in officing needs and rise in downsizing and subletting would have led rental rates to drop. Nevertheless, rates have stayed consistent.
This does not mean that tenants have no leverage. In fact, landlords are now more willing to agree to tenant-friendly concession packages, which include flexible leasing strategies like phased occupancy. Landlords are recognizing the value of fast-growing companies and are more and more willing to set aside space to accommodate future growth. And these concessions are not just being extended to larger companies. Today, small companies are finding that they have more negotiating power and can leverage more than ever to reach a leasing solution that benefits them both now and in the long run.