Rising Tenant Deposits Threaten to Overshadow Flexible Workspace Opportunities

“Landlords are asking more tenants for higher deposits. Deposits are highest for younger, venture-backed companies without much operating history or clear path to profitability.”

This is a warning from Alex Lassar, Senior Vice President at JLL in San Francisco, who has spotted a “clear trend” in rising tenant deposits within the local market.

Lassar explains: “While some companies with very strong credit may never be asked for a deposit, others – with shaky or not so established credit – may be required to pay six, nine, sometimes twelve or more months’ rent in advance.

“That’s what we’re seeing more of in the market today.”

Why? According to Lassar, landlords are raising deposits because they are looking to recoup capital they’ve already invested in their space to attract tenants. This has as much to do with ‘why now’ as it does ‘why here’; Lassar has noted this trend in San Francisco’s Bay Area in particular – yet even if you’re not focused on the San Francisco market, don’t breathe easy just yet.

We know that the flexible workspace industry is growing and operators are actively looking for – and finding – new ways to expand. Likewise, commercial property landlords are seeking to capitalise on this flourishing market sector, and if success breeds success, you can bet landlords in other locations will consider raising deposits, too.

The question is, will this trend slow down or accelerate the growth of our industry?

In some cases, a higher-than-average tenant deposit will indeed make it harder for business centres or coworking spaces to open new locations. It’s difficult enough finding a suitable building in which to launch; the addition of an unexpectedly high deposit could easily turn potential deals to dust.

While the threat of lost deals may deter some landlords from pushing up deposits, there’s no denying that competition within our industry is intensifying. For every operator that backs out, another better-funded operator – of which we’re seeing an astonishing amount – may be ready and waiting to pick up the slack.

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Furthermore, corporates or mid-sized clients looking to take up their own office leases are facing the same problem. According to Lassar: “Companies don’t see a return of their deposit until the lease is over. On a five to ten, even a shorter-term three-year lease, that’s a long time for most companies to tie up valuable working capital.”

If the tenant deposit eclipses the up-front investment they have set aside to build-out their space – which Lassar says is happening, in some cases – then those clients may consider a flexible workspace as an alternative.

And let’s look at this another way: will this new trend encourage flexible workspace operators to consider raising deposits for their own clients, too? If their workspace must face an extortionate up-front bill, that extra deposit from clients will certainly soften the blow.

All things considered, this trend could spark opportunities for our sector as well as certain challenges.

As for the problem of tenant deposits for workspace operators, Lassar offers two solutions:

  1. Do your own work: “Look for buildings, spaces and fringe situations where landlords haven’t recently put a lot of fresh capital into a space,” he says. This bracket includes “freshly vacated ‘second generation’ spaces”, especially properties that were until recently under a long-term lease, as they often have “very valuable and functional improvements already in place”.
  2. Get points for good behaviour: According to Lassar, some landlords offer performance clauses or “burn-downs” when negotiating deposits, which enables a tenant to recoup part of their deposit early in the lease providing they pay on time, in full, and play by the rules.

Have you faced a high deposit clause? Has it restricted or benefited your growth plans? Let us know at twitter.com/Allwork_space or facebook.com/workspacenews.