Office leasing companies that offer tenants fully furnished and staffed facilities -- once seen as a boon for the commercial real estate industry -- are suffering serious setbacks in the fiercely competitive Washington market.
At least five companies have gone out of business in the Washington area in the past nine months, according to several industry sources. These and dozens of similar companies nationwide have failed, defeated by high operating costs, inexperienced management, an oversupply of office space and a glut of office suite firms.
In Washington's overbuilt office market, developers have found that leasing to office suite companies consumes a lot of their empty space and impresses lenders, who like to know that building owners will be successful before giving them long-term loans. But developers have frequently had to offer such generous concessions as months of free rent and cash for decorating the offices in order to lease their available space.
"Many operators in the executive suites business are there because of concessions offered by developers rather than because they analyzed the market," said Paul A. Swindley, who has been in the business more than 10 years and now heads his own shared-office leasing company.
Developers also "have become much more aggressive" in efforts to lease their offices to smaller firms, according to Swindley, who said he recently lost a tenant in one of his shared offices when a building owner offered the small company eight months' free rent in return for signing a three-year lease. The attention that developers are paying to small space users "is having a significant impact" on the shared-office suites business, he added.
Occupancy in Swindley's older locations is at about 80 percent, "less than we really would have expected." He said the company has postponed plans until next year to move into other metropolitan areas. "We thought we would be going into three areas by this time," but the company is now being more conservative.
Several major developers, including The Oliver Carr Co. and Western Development Corp., are leasing major blocks of space to shared-office suite companies, according to Stephen B. Goldstein, senior vice president in the Washington office of Julian J. Studley Inc., a commercial leasing firm.
"Given the opportunity to rent to sound, existing businesses like law firms or trade associations, versus an executive suite company, a developer would more likely choose" the existing companies, Goldstein said. He said, however, that executive suite businesses often have substantial financial statements. "People are doing deals like this all over town," he said.
Shared-office suites are ideal for some tenants, and will become a permanent part of the commercial real estate world, according to several industry professionals.
"With growing awareness in the marketplace, this will become a solid industry," Swindley said. "It is running ahead in development without the client base to support it now."
A shakeout has already begun, however, and will result in the emergence of a few large regional and national companies, he said.
An exception to this trend is Louise Lynch, who with a partner started a shared-office business in Washington more than 20 years ago. At the time, many small companies and individuals who needed and wanted offices but could not afford to rent, equip and staff their own thought it was a great idea.
Today Lynch is still in business, operating about 100 executive office suites, as they are sometimes called, in Metropolitan Square, a 15th Street NW office building.
"Some companies have come and gone and have been resurrected again," Lynch said of the failures in the industry. Operating in a saturated market, she said many Washington firms "are not having as much success as they would like."
Like most companies, Lynch's firm offers a package of services that include a receptionist, secretarial help, telephones, office furniture and other equipment. Or, if they prefer, tenants can choose the services they want, she said. Charges range from $1,000 a month for a 10-by-14-foot office to about $2,600 for a larger corner office with windows and a view. The cost is much higher than a company would pay for the same amount of unfurnished office space, but it can be cheaper for small companies or individuals who need office space.
Graphic designer Jean Franz said she rented a small office from Lynch two years ago when she wanted "a nice downtown location but didn't need a great deal of room." She started with one room and has expanded to three. "One of the very best features is that I can have extra space when I need it" on a temporary basis, she said.
Such success has eluded many office suite firms.
"Typically, people get into the business with high hopes but find it takes a lot of money to run one," said Karen Anderson, who came to Washington six years ago with a California company that was expanding, but left the firm when it faced bankruptcy.
Much of the space the firm leased was in buildings east of 15th Street before the area became acceptable to major companies and other tenants.
One of the buildings in which the California firm took space was owned by developer David Burka. When the company went bankrupt, Burka said he took over the office suites and is "still working out some of the problems" the company left behind.
The suites, which occupy 63,000 square feet on two floors of his Massachusetts Avenue building, are 90 percent leased but "not financially successful yet," he said.
He expects to eventually put the business on a sound footing, but said, "One problem is that these things are springing up all over the place."