Here’s What The Future Holds For CRE Landlords And Flexible Space Operators

Published on September 10, 2020 - By Jo Meunier (née Disney)

• Flexibility is the cornerstone that’s supporting businesses, teams, and individuals, and this has a tremendous impact on CRE. 
• Providing flexibility empowers and instils trust in workers by giving them choice.
• A recent webinar from essensys and Bisnow brought together experts from flexible space, commercial real estate, and technology, to examine the current trend of occupiers seeking more flexibility, and whether landlords have the skills and mindset to capitalise on this demand.

In our new way of working, flexibility is the cornerstone that’s supporting businesses, teams and individuals through the current situation.

It’s not just about having a flexible or short-term office lease. It’s about flexibility for people; when they work, where they work, and how often they go to an office or third place.

There’s a lot of fear and uncertainty surrounding the current situation, and in addition to concerns over job security and market volatility, people are worried about their health and the health of their families. Providing flexibility empowers and instils trust in workers by giving them choice, which could be as simple as allowing them to start work later and miss the rush hour, or work remotely one or two days per week.

Suggested Reading: We’re Nearing a Mental Health Breaking Point: Here’s What Companies Can Do to Support Their Workers

Of course these decisions are having a profound impact on CRE.

If workers choose to work at home or remotely just two days per week out of five, their office space will sit empty 40% of the time. As the pandemic persists and companies switch to flexible workplace options or seek to shorten their lease terms, what does this mean for commercial real estate? Is flex the future? Or will there always be a place for traditional office leases?

A webinar hosted by essensys and Bisnow attempted to answer these questions.

Titled ‘What Does Flexibility Mean in the New World of Offices?’, the webinar brought together experts from flexible space, commercial real estate, and technology, to examine the current (and accelerating) trend of occupiers seeking more flexibility, and whether landlords have the skills and mindset to capitalise on this demand.

The panel featured:

• Mark Furness, essensys
• Jamie Hodari, Industrious
• Thais Galli, Tishman Speyer – Studio
• Chad Phillips, Nuveen
• Moderated by Mike Phillips, UK Editor of Bisnow

Jamie Hodari of Industrious, which has flexible offices in 55 US cities, noted that after an initial slump between April and May, demand has bounced back and sales are currently at 75% of pre-Covid levels.

“I would not have predicted that,” he said.

According to Hodari, customers are seeking “a desire for flexibility, nimbleness, just in time, and less operationally burdensome solutions”, and in addition, they want to “put the power in their employees’ hands” so they can choose when to go to work, and where.

This isn’t necessarily working from home; it might be working close to a relative’s home, in which case they want access to an office network with multiple locations rather than a single workspace.

Ultimately, these requirements “play very much into our corner of CRE”, noted Hodari.

“Multi-pronged solutions”

Nuveen’s Chad Phillips noted that this is where the ‘hub and spoke’ model comes in, particularly for larger companies who want “multi-pronged” solutions.

“Clients want to know where we are around the country and what we have in the suburbs. They have hundreds or sometimes thousands of employees and they are not looking at full-time working from home, but a mix — some home, some flex, and some hub and spoke.”

Thais Galli from Tishman Speyer’s Studio, the flex side of the business, concurred.

“We’re seeing growing demand for flex,” she said. “Companies want flexibility but also they want options in terms of locations and where they work from.

“I believe flex is going to come back stronger and is going to be a stronger product than it was before [Covid] and a higher portion of our product mix.”

Asked how large that portion of Tishman Speyer might be, Galli estimated it will be 10% of the business over the next 5-10 years, and “eventually it will be larger, around 20-25%.”

Smaller offices for safe, spacious environments

Interestingly, Galli, like Hodari, is seeing more demand for smaller offices.

Companies are looking for multiple small, private offices so they can accommodate fewer people in each space safely, in line with physical distancing.

Also, Galli has noted a shift in companies that were initially looking for traditional space and lease options. She said that many of them “have switched to flex with the view that, when they’re ready, they will move up to traditional space.”

With concerns over market volatility, operator sustainability is also a key part of the decision process. “They want to be confident that the operator is sustainable and will be around in the future, and that they’re not going to be left hanging,” added Galli.

A flexible future?

But what about commercial real estate landlords? What does the future hold?

Mark Furness from essensys believes that “people are looking for optionality” and they expect future transactions to be more flexible.

“It must involve a digital infrastructure. For many, the challenge is plugging together a traditional space with flexible options and coworking, and bringing them together to make it work for the occupier. They can build it, but it needs operational and tech cohesion.”

The big challenge, noted Furness, is that “very few landlords are tooled up, skilled up and capable of dealing with the technology point of view”, which is where companies like essensys help bridge the worlds of real estate, flexibility, and user experience.

“Landlords think flex is an easy answer. Running a small amount of flex space is doable but the challenge comes when you want to build that out and scale it. That’s where the interesting point of the market is right now. The question is no longer why do we have to do this; the big challenge is how. It takes time, money, effort and the right technology.”

From “arm’s length” to a working relationship

Of course, one route for landlords is to enter management agreements with operators rather than simply leasing out space, or running it themselves.

For Hodari, the push from landlords to incorporate flexible space into their portfolios has provided an opportunity rather than a threat.

“This push has been very helpful for us,” he said, as it has transformed landlord relationships from being “at arm’s length” to actively partnering and working together.

“My sense of whether a landlord should do this on their own or with a partner is not really financial; it’s more of a structural question.” While there are landlords that prefer to control their building top to bottom and don’t want partners, others want to provide a better workplace experience and they choose to “outsource” the operational side to a workspace partner.

Looking ahead, Galli concluded: “Demand is shifting and what clients are looking for is different. So we’re shifting with it. More and more, landlords are going to have to think about their space differently; they need to make coming to the office attractive and more productive. They should be able to really target or work with their tenants to create that type of space, and to provide the type of flexible product they want.”