On Tuesday, Westminster Property Association’s NextGen committee held a panel discussion about occupiers of commercial real estate, their evolving requirements and the effect on landlords and developers.
There has been a transition, as noted by Katherine Bain from CBRE, from the traditional model of landlords driving developments, to occupiers having increased influence, and now to occupiers’ workforces exerting more influence from the outset. This has resulted in a focus on optimising employee satisfaction and talent retention, from the latest wellness trends to agile working.
Optimising human capital
Following a recent survey (available here), Richard Holberton from CBRE discussed four ways in which landlords could assist occupiers to optimise their human capital:
- Smart spaces: Though 45% of occupiers still expect Category A fit-out, nearly half are prepared to pay 10% above market rents for technology-enabled spaces. However, occupiers are still willing to pay a greater rental premium for services than technology.
- Flexibility: Occupiers are keen to have flexible space, with a slight preference for serviced offices over co-working spaces.
- User experience: Richard noted that user experience is in its infancy. The current focus is on the physical aspects of available space (such as the provision of a wide variety of amenities), but there are many factors which can affect user experience, although there are difficulties in quantifying this. Katherine Bain noted that, despite 70% of stock in the West End being second hand, take-up in the current market is heavily weighted to new buildings, as occupiers are keen to attract and retain good staff.
- Data strategy: 70% of occupiers intend to increase their investment in technology in the next three years. Where technology was previously used to manage buildings, it is now being used to enhance user experience. Running alongside the huge opportunities technology offers are the risks associated with the collection and retention of data. Having a comprehensive data strategy will therefore be vital. We have previously considered the value of big data in the real estate industry, in a post available here.
Wellness, defined broadly as physical, social and mental wellbeing, is according to McKinsey & Company the next trillion dollar industry and it is now an important consideration for occupiers in the service industry. The wellness of their talent pool is increasingly seen as key to the success of the business.
Seven buildings in London now have WELL certificates, three of which are occupied by panellists. The WELL framework looks at core aspects of how buildings improve health and wellbeing, and provides a standardised approach to verifying performance.
However, Chris Robinson from Deloitte LLP noted that the importance of wellness in real estate depends on the specific occupier (including their culture, scale of the project, budget and the education of their decision makers). Large scale projects may have a dedicated wellness consultant, whereas in smaller projects, the decision makers themselves may be driving the wellness strategy.
By considering wellness early in developments, Katherine Bain noted that, in addition to reducing development costs, it would increase longevity of spaces, which is a key consideration for occupiers.
In the last ten years wellness has moved up the agenda for occupiers, but this has been in a largely favourable market and Chris Robinson highlighted that there is a constant balance between cost and enhancing user experience. However, Grant Kanik from HKS Architects Limited noted that expenditure on wellness when designing and constructing buildings translates into profit for employers, through increased productivity, better staff retention and fewer sick-days. As the wellness industry evolves, Kavita Kumari from Cundall flagged that more data on the financial impact for developers, landlords and tenants would become available: it will be interesting to see whether the additional capital costs translate into higher rents, even where the benefits for tenants are not tangible.
Evolution in workplaces
The panel identified flexibility, agility and technology as essential considerations for occupiers.
Occupiers are generally looking to reduce their overall property portfolio by adapting a more agile working environment. For example, Deloitte LLP assisted American Express with an approximate 40% reduction in their property portfolio. Although the panel focused on the resulting improvement to staff satisfaction and productivity, Katherine Bain noted that cost efficiencies remain a key consideration, given that real estate is still the second highest expense for most businesses.
Advances in technology and its potential effect on the real estate market could be potentially revolutionary according to Grant Kanik who identified 5G as a big disrupter. As well as assisting agile working, technology’s effect on mental health and productivity will be an area to watch. Grant noted that rates of depression and stress leave were major threats to the economy, especially as the UK moves further towards being a knowledge based service provider.
Katherine Bain identified a tiered approach towards workplaces:
- Large corporate businesses with mature real estate functions are adopting flexible approaches but are not necessarily reducing the space they occupy.
- Smaller businesses (especially in the West End) tend to be nervous about adopting new technology and radically changing their workplaces. However, they are taking advantage of increased availability of serviced offices and flexible letting arrangements such as those considered in this article. Following the recent serviced office boom, Chris Robinson was interested to see whether a less favourable market in the next few years might reduce the number of competitors in this space.
- Middle tier businesses are more focused on flexible lease terms, with break rights, options and pre-emption rights allowing retraction or growth: being a tenant of a fully let building with no room to expand may not be the best option. James Burrage from Great Portland Estates noted that this shift from traditional leases towards increased flexibility may need to change how buildings are valued by landlords and lenders.
In an environment where occupiers identify labour and skills shortages as a key strategic challenge, decision-making across a range of issues is increasingly dominated by the need to optimise human capital.