Short-Term vs. Long-Term: What Kind of Lease Is Right for Your Business?
The right office space can help startups and small businesses grow into industry juggernauts.
As you narrow down your search for new office space, you’re going to eventually have to decide whether to sign a short-term or long-term lease. Both options have their pros and cons.
We can find short-term leases from month-to-month up to 24-month terms. Long-term leases, on the other hand, might be defined as a 24-month term to some tenants, but we often see NYC commercial real estate landlords consider 3-year terms as the minimum length of commitment.
Depending where they are in their development, some organizations will undoubtedly benefit from signing shorter-term deals. The future is hard to predict, and it would be unwise for fast-moving startups to tie up a bunch of capital in office space they may eventually grow out of—or not really need in the first place.
More established organizations, on the other hand, might be better off signing longer-term deals. Generally speaking, companies get more affordable terms on longer-term leases.
What does this mean for your business?
When considering a short-term vs. a long-term lease, you should assess your organization’s ability to project future headcount, the functionality of the space itself, and your financial situation (e.g., revenue and funding) to determine whether you can afford it in the first place.
The Benefits of Short-Term Leases
Short-term leases offer companies the ability to occupy an office space while establishing their business.
Companies that sign short-term leases don’t have to assume the risk of holding onto a space for a lengthy time if their headcount outgrows the square footage. They also don’t have to worry about being obligated to cover rent for an extended period of time if they’re already struggling to piece funds together month-by-month.
During a real estate bull market, companies would be wise not to commit to a longer-term lease unless it’s absolutely necessary. By signing a shorter lease—even if you plan on sticking around longer than the terms indicate—tenants might have the option to negotiate a better lease when the market becomes more favorable on the demand side.
The Benefits of Long-Term Leases
When companies have more solid hiring plans in place, as well as a robust funding or revenue model, the appeal of long-term leases becomes more evident.
Businesses in such a situation can negotiate from a position of power when discussing terms of a lease. Eying a steady stream of revenue, landlords will make more concessions. They’re more likely to cover construction costs, too.
And the best part? During tenant-favorable market conditions, companies can get really, really good deals on rent when they sign long-term deals.
It’s worth noting that some companies are taking on more space than they currently need right now for interesting reasons. They plan to grow into it, but in the meantime, they’re trying to monetize their excess space by subleasing seats and offices to smaller companies.
There are even platforms, like PivotDesk, that help companies with extra space find other businesses that are looking for it (in the form of short-term, shared options usually).
But Long-Term Leases Have Their Downsides, Too
When companies do decide to take on the commitment of a long-term lease, the exposure to risks is increased as long as the lease is running.
For example, organizations can outgrow the physical space and be forced to seek ways to accommodate additional staff. On the flipside, they might not grow large enough to utilize the entire space cost-efficiently.
There’s also the chance that companies go bust and they’re unable to cover their rent obligations over the entire term of the lease.
Is Your Company New? Short-Term is the Way to Go
For an early-stage or newly-formed company, it is always advisable to secure short-term leases. This way, you can focus on building and proving your main business. When possible, try to find spaces in the form of flexible-term shared subleases. You can also look for dedicated, fixed-term subleases.
Don’t sandbag your organization by signing a long-term lease too soon. Shorter leases will give you the flexibility you need to thrive in today’s fast-paced business world.