If you are going to negotiate serviced office prices, chances are it will be based on a 12-month contract term.

You will also likely be advised that this increases chances of good discounts because that’s the term operators want.

But the most important conversation you should have with your coworking broker or agent is about years 2, 3 and beyond.

Ps, if you are happy to move offices every year then then this information won’t matter much, keep discount hunting.

But most companies don’t want to do that in an ideal world. So you need to understand how some things work:

Negotiate serviced office prices with a long-term plan in mind

When coworking operators plan out the P&L for their buildings, two figures impact you over time:

1) The target price per desk (or per square foot), which increases slowly over time alongside assumed reduction in availability as offices are sold, and

2) The target renewal uplift applied to expiring contracts which (and this is key) is often tied to the target price, not the price you agree at the point of sale

So if you sign a 12mth term at the target price and a year later the target price has increased by 1% and the target uplift is 5%, you can renew with that c.6% uplift.

But if you signed at a discount of, say, 25%, then the operator’s ideal outcome will be to recoup the original 25% discount as well as the 1% price increase and the 5% renewal uplift. All of a sudden, you’re looking at 30%+ YOY cost increase.

Serviced office price uplifts are designed to churn low-paying customers

This combined mechanic works to continuously churn the lowest-paying customers with a view to replacing them with higher-paying customers.

So if the commercial aspects of your contract are not appealing to an operator at the point of renewal, or you don’t want to agree to proposed renewal terms when those negotiations conclude, they can just tell you to move out.

(Remember that in coworking buildings you are taking space on a license, not a lease. This means you don’t really have any rights to the occupation of the space.)

Obviously things are rarely this black-and-white. Market conditions change over time and it may well be the case that your renewal will fall within a cycle where competition is high and occupancy is low – in which case you can take an aggressive stance on negotiations and the operator will have to swallow a lower increase.

But the market can just as easily turn in the opposite direction – remember, flex is a very fast-paced niche – and in these cases the 30% example above might be quite conservative.

The highest I’ve ever seen in my 20+ years of brokering flexible offices is c.70% YOY uplift. It was an eye-opener.

Needless to say, the client didn’t renew.

Cost increases are not unusual

If all of this is sounding a bit doom-and-gloom, it really shouldn’t. None of these aspects of flexible office contracts are unusual, nor should it be at all surprising that the coworking industry needs to make money and the way they make that money is through their license fees.

If the license fees go up, profits go up. If they are forced to discount heavily, profits go down and have to be recouped down the line. That’s just basic business.

But because contract lengths in flex are so much shorter than in traditional leasehold offices, these situations come up much more often.

The issue seems to be that these things are not talked about often enough or openly enough – both at coworking operator side and at broker / agent side.

There might be several reasons for this.

Negotiating serviced office prices for 12 months helps brokers who receive fees

On the coworking broker side of things, their fees are capped at a percentage of the contract value over the course of 12 months maximum. There are some exceptions to this, but for the most part this is a fact. This means that a broker can generate multiple fees from a single client as long as that client moves every 12 months, since they generally don’t get paid for years 2 and beyond.

With this in mind, there could be a temptation to make sure that “all roads lead to a 12-month term” and advice is structured to focus on this contract length as carrying the greatest benefit for the tenant.

On the operator side, it may be as simple as the sales people on the ground not having the full picture when it comes to the issues discussed above (lack of clarity in communication from above) or not enough confidence in bringing underlying commercial facts into the negotiation.

Regardless, it’s important to have these conversations and explore options that satisfy both sides.

These usually take the form of either stepped rent increases or capped uplift guarantees.

Stepped rent increases will typically offer lower rent in the early stages of the contract which then ramps up in the latter half, or increases incrementally monthly or quarterly. This ensures the client gets the overall discount they want from the total initial contract value quoted, whilst also making sure the final rent is close enough to the operator’s uplift requirements so as not to be a shock to the system at renewal.

Capped uplift guarantees do what they say on the tin – the price will not increase by more than X in year 2.

It’s important to talk about this from the outset

Both the operator and your broker should be starting these conversations with you to make sure you negotiate serviced office prices that satisfy both your immediate and future needs.

If they’re not, or it seems they’re reluctant to move away from the idea of a 1-year contract, ask lots of questions to see if there are any underlying reasons linked to future increases or fees linked to your transaction.

Ultimately, you as the customer should realise that there is a balance to be struck between your pursuit of the biggest possible discount from the initial contract and the implications this has on long-term price stability.

If you are on the lookout for the right broker to help you, use our unique directory of individual broker profiles which you can filter using professional and personality traits. Make the right connection first-time, every time.