The Occupier 2019 Predictions: Responding to Tenants, Real Estate as a Service
This is the second in the 10-part series, The Occupier: 2019 Predictions.
The past couple of years have represented a watershed moment for the real estate industry as tenant calls for more flexibility and changes to the traditional leasing model have gotten louder.
The resurgence of a mature serviced office product that offers solutions to the whole business community has only increased expectations from tenants to be treated by landlords like a consumer rather than just another company on the rent roll. This shift is moving us to a place where we view real estate as a service (REAaS), providing solutions for clients that meet their often-complex requirements. By definition, this model is highly disruptive to an industry that has, to date, been slow to respond to the calls for flexibility and change.
Taking 2018 by storm, the greatest disrupter of the market status-quo has been the proliferation of the serviced office. Not just the rise and coverage of providers but importantly the eagerness of businesses to subscribe. Whilst the ‘plug and play’ as a core offering remains the essence of a serviced office, operators are now responding to tenants’ growing requirements, developing their product in terms of space, location, cost and additional benefits (beer on tap!).It has moved the commercial office space to a place where it can be legitimately viewed as a product that can be dialled-up or down depending on current needs, rather than a fixed and inflexible asset (or liability!). As a market that was once dominated by transient companies or firms in upscale mode, it now attracts a greater breadth of users including the medium-to-large firms. We can see from our own clients the benefit that the flexible solution brings to a business’s real estate strategy. The ability to quickly and efficiently sign up to a new workplace can be as simple as walking in to a space armed with nothing but a pen and a credit card.
Leasing in the 21st Century
The ease with which a ‘transaction’ can be completed flies in the face of the more conventional leasing approach. In addition, the recent accounting standard changes (IFRS16) will lead to a different relationship being sought between a company and its offices – on paper that is. What is clear is that the market for office leasing has been disrupted and the risk that this poses to traditional landlords is potentially significant. Some have already been affected by the growth of serviced office provision as firms switch to flexible. This does not spell the end of companies signing up to leaseholds of longer than 5 years, but it will force landlords, tenants, property agents and legal advisors to adapt and bring the transactional side of property leasing into the 21st century.
Technology has made transacting simpler and far more efficient, as businesses increasingly view the office or space they occupy as a product. Utilising technology to speed up the leasing process, the development of shorter lease documents and using the internet as a means to transact rather than just market properties will revolutionise the industry. The mindset and desire of office tenants has changed. It is now time for market players to deliver. Landlords and developers need to simplify their offerings and deliver their product tailored to their consumer. The biggest challenge will be how relationships are fostered, developed and managed such that landlords are able to walk-the-walk with credibility. As the market increasingly becomes more fluid, so does loyalty and service companies thrive off loyalty. The year ahead will see landlords seek a greater closeness with both existing and future tenants, whilst embracing change in order to respond to new demands. We believe that 2019 will be the year in which commercial real estate is viewed and treated as a service. The question is how well will the market respond?