March 15, 2023
Only around 14 percent of office occupiers believe their existing workspace portfolios align completely with their business objectives, according to a new report on the future of the office by the Urban Land Institute and The Instant Group. The ‘state of flux’ identified in the report suggests that while the office is ‘here to stay’, the sector is bracing itself for a profound shift. Two thirds (62 percent) of office landlords expect a decrease in capital values with the current valuation model and less than 2 percent of asset owners feel they have the required capex to respond to occupier and ESG legislation-related requirements.
The authors claim that an analysis from the global survey proves that occupiers are still trying to figure out the impact of new activity-based workplace (ABW) strategies and hybrid working patterns, leading to demands for a flexible approach from landlords who, at the same time, are trying to cope with cyclical challenges following increasing interest rates, ongoing high inflation and construction costs.
As part of the report, 285 office occupiers, landlords and third-party advisors in North America, Europe, Asia Pacific, Middle East and South America responded to a survey. In addition, in-depth interviews with leading industry experts and two roundtables were held, to shed light on changing occupier demands, the response from landlords and the impact on their business models.
While the office has a key role to play in occupiers’ workplace strategies in conveying the corporate culture, stimulating collaboration and mentoring new and younger team members, the report reveals that now only 14 percent of occupiers believe their existing workspace portfolios align completely with their business objectives and strategies.
According to research carried out by The Instant Group, demand for flex office space has increased 29 percent globally since the pandemic, in response to these changing demands. And in parallel, the study claimsthat landlords (80 percent) even more so than occupiers (75 percent) expect greater lease flexibility and agility over the next five years. There are regional and sector variations on what that flexibility should look like but most agreement exists around new lease structures that allow occupiers to grow and shrink their office footprint within a single contract. “In a sense, the leasing relationship will need to become more of a partnership between the landlord and occupier,” suggests Craig Hughes, The Instant Group.
The demand for shorter more flexible leases and pay-per-use services calls for business model reinventions: 62 percent of landlords expect a decrease in capital values with the current valuation model, which only awards long term contracts. With the office provider evolving from a space to space-as-a-service approach focusing on operational management of buildings, a new approach to real estate valuations is needed. Valuations need to acknowledge the value of providing additional services and amenities, building partnerships between landlords and occupiers and a strong brand and reputation, while also recognising the impact of flexibility and varying lease lengths.
For landlords, the time to improve energy efficiency is now. While ESG is a major focus for occupiers, less than two percent of asset owners feel they have the required capex to respond to ESG legislation-related requirements. With occupiers focused on reducing overall occupancy costs, improved energy efficiency is a prerequisite for landlords to retain tenants and preserve rental income. Tech features, like monitoring occupancy and energy efficiency, that were previously “nice to have”, will now be necessary, with data-capture essential to boosting transparency and achieving net zero targets.
Image: Instant Group