What does the new year have in store for the corporate real estate market? John Spencer, CEO of Landmark, predicts a strategic shift in favour of shorter leases and flexibility
According to the annual Knight Frank global occupier report published at the end of last year, real estate is more than ever a strategic device for businesses. The report, which is compiled following interviews with over 100 global corporate real estate leaders, predicts that flexibility will become an even more significant driver in real estate choices.
This comes at a time when many leases are expiring in the UK, when Brexit continues to create uncertainty, and new accounting standards mean greater scrutiny of balance sheets as leases are recorded as assets and liabilities. For anyone not familiar with the International Financial Reporting Standards (IFRS), they came into force in January 2018 and mean that UK businesses effectively have to add £200 billion of liabilities to their balance sheets. Businesses with multiple offices will be particularly affected, financial stability may be more openly questioned, and credit ratings could be affected.
One result is that long leases are going to be viewed far less favourably. Occupiers will be reluctant to commit to too much over an extended period, and will be attracted by real estate solutions offering agility and flexibility.
There is already evidence of this. Savills reported an increase in serviced office take-up of 150 per cent in the UK in 2017. Late last year, JLL predicted that flexible working space will grow by up to 30 per cent annually to meet the rising demand for flexible workspace. In the last year, Landmark has increased its footprint to one million square feet across London’s West End and City as well as in Manchester and Birmingham. We have taken entire buildings as well as individual floors, and will continue to expand. Our rivals are doing the same.
This increase in supply will continue to serve large corporates, which use it for projects and overspill but also to add to the variety of the space available to staff. Start-ups and SMEs will also continue to be attracted to serviced office space, and we anticipate that European firms may take some too, especially in London, ensuring they have a UK hub as Brexit looms.
Alongside flexibility, another key attraction of serviced offices is that they provide the variety of space and amenity that many employees now want and that cannot always be accommodated in a traditional office, especially on a small floorplate. They offer creative, collaborative environments and a place to meet other like-minded businesses. This mix is becoming so important that some corporates are mimicking this type of environment in their own buildings, while others are exploring leasing whole serviced office buildings rather than opting for a Cat A space and fitting it out themselves.
It all comes down to the need to attract and retain staff in the ongoing war for talent. According to Knight Frank, the cost of staff is now four times that of property – and the loss of staff is up to 10 times more than the cost of accommodating them. The quality of the working environment has become crucial in today’s market, and a significant part of the decision-making process for candidates.
First, the serviced office market has grown up. From being a market disrupter, it is now an accepted part of the real estate mix. It’s also at the forefront of the workplace-as-a-service model, where workspace blends with spaces to meet, collaborate, dine and socialise. Bringing all these services into a traditional space can be costly and requires a lot of maintenance. Serviced offices are already fully equipped.
They also typically provide a higher standard of service in terms of operation and experience. The FM function is highly sophisticated with all elements working together seamlessly. Cleaning and maintenance are more responsive, and there is potential for IoT-enabled space with sensors to monitor occupancy and automatically adjust temperature, lighting levels and air quality. The hospitality, catering, front-of-house and concierge services reflect those found in restaurants and hotels. Effectiveness, efficiency and wellbeing are at the heart of this model.
The FM sector can learn much from flexible workspaces that can be applied to more traditional premises, but it should also be an option if an organisation is reviewing a break clause or coming to the end of a lease. It delivers on the growing demand for shorter leases, highlighted by the recent MSCI Lease Events Review, which states that the proportion of leases shorter than five years has increased to 42.1 per cent. Leases of serviced offices are typically 12 months with the option to expand and contract as needed.
What’s on offer is varied and becoming more so. There are experienced operators focused on the SME market, smaller ones seeking to service a local area, and niche players specialising in specific industries or business types. Competition is intensifying for grade A space in the top locations, where flexible workspace operators are competing with traditional landlords. Differentiation will become important across the board, with each operator having to develop a strong identity and a clear offer so the choice is clear.
From busy co-working environments for start-ups to more professional environments, there is a great deal of choice and functionality is critical, with sophisticated and fully integrated facilities management. (Landmark is the only UK operator owned by an FM company, OCS Group.)
Client service is at the heart of the serviced office offer. It is how operators attract and retain businesses, especially as supply and choice increase. Operators must be responsive to occupier needs and ensure their staff are equipped with the necessary skills – ideally trained to Institute of Customer Service standards.
The market is adopting more consumer tools to highlight performance, a useful trend that will provide clients with a benchmark of what’s on offer. Such tools include Net Promoter Scores, which measure the willingness of customers to recommend a company’s products or services and is a gauge of overall satisfaction. It is used by major retailers – Apple and Amazon score highly with 72 and 62 respectively.
To sum up, serviced offices provide businesses with the opportunity to provide the amenities and environments that attract and retain staff without the price tag and operational responsibility. As 2019 unfolds there will be a greater emphasis on differentiation and service delivery, providing more choice for occupiers.
For in-house real estate and facilities management teams, we believe this will mean a strategic shift focused on driving lease lengths down while benefiting from the best space on the market. Many may find themselves managing existing traditional space alongside overseeing a mix of flexible, serviced office accommodation, where continuity of experience for staff and clients will be the priority.