As vaccine rollouts continue and city and state economies reopen, the office sector is poised for an increasingly widespread return-to-work movement. However, “return to work” doesn’t mean a return to pre-pandemic business as usual.
For both landlords and tenants, the remote work environment of the pandemic raised new questions about space utilization. Against this backdrop, independent market intelligence firm Verdantix conducted research into landlord and tenant real estate strategies, post-pandemic.
The Verdantix team spoke with global landlords representing a combined portfolio of 2.5 billion square feet and enterprise occupiers to better understand the drivers of demand for flex space and the business benefits of occupying such space. The research, commissioned by essensys, the leading global provider of software-as-a-service and technology to the flexible workspace industry, has implications for both occupiers and landlords.
Connect Commercial Real Estate spoke with Chris James, SVP of business development at essensys, on the implications for occupiers:
Q: When people see the term “flex space,” they may have different perceptions of what it means. How do you define the term?
A: Flex is not just associated with lease term, and I think that’s a misconception among a lot of landlords. They hear the term “flex,” and they cringe, because they’re thinking “short-term leases, high turnover; what does that look like for my building?” and it becomes a scary thing for them. But flex is so much bigger than the term of the offering. What we saw, especially pre-pandemic, was that while tenants were willing to sign, when they looked at flex they were looking more at the services associated with the space, and asking what were they getting that historically they would have had to deal with on their own.
Whether you’re talking about private office, dedicated office suites, spec suites, or more traditional coworking, I think of flex as the four walls of the space—how it’s built out. Then I think of a furniture option, and then I look at the digital infrastructure and the software capabilities. It’s not only the internet and the Wi-Fi, but also the tenant experience. Is it an app? Is it a web portal? How do tenants access it? That’s the day-to-day operations. Anything over and above that is just the icing on the cake: coffee, catered services or some of the other things that operators have historically rolled into the package.
Q: Would it be accurate to say that occupiers have a better idea of what they’re looking for in terms of flex offerings?
A: Tenants are looking for a few things. They’re looking for speed to occupancy; whatever can get them in the space the fastest is typically the best option for them. Then they’re looking at what that experience is for them. We’re seeing a lot of companies trying to bring their employees back to the office; many have been working at home or remotely, and a lot of them like that. So occupiers are looking at what the best return to office experience will be for their employees.
Then they’re looking at flexibility of term. Without knowing exactly what their occupancy will be or what the best real estate setup will be for them, they’re looking for flexibility so they can start to understand what the future looks like for their real estate portfolio.
Q: Compared even to earlier this year, more occupiers have decided on a hybrid working model as opposed to simply doing away with office space altogether. Does it appear that the question of how flex could meet their requirements has come more into focus?
A: We’ve heard a lot of discussion about the hub-and-spoke model, or a hybrid model where employees are only in the office a certain number of days. We haven’t seen many occupiers actually moving toward that yet. But we’re going to have a better idea in the next six months of how that works. You may have a 20,000-square-foot user that says their footprint is going to decrease by 5,000 square feet because they’re going to operate in a flexible environment, but then they realize that people will want more space to move throughout the office and they’ll want more amenities in that space. So they’re now going to need that 5,000 square feet back so they can build in those features that their employees will want.
I don’t think footprints are going to change significantly in the near future. But I expect we will see a shift in their expectations of what that space needs to look like and the purpose it needs to serve.
Q: How can some of the different flex options help meet those requirements for occupiers?
A: With flex space occupiers have the opportunity to try different space strategies out instead of putting all of their eggs in a 10-year basket and hoping it was the right decision. There may be variations in their approach, but one thing we can expect, regardless of what space they choose or what the term is, they’re going to want more services. They’re going to want a better overall experience.
The software and technology are a critical component to delivering these services and ensuring seamless occupier experiences. A big part of what our software and digital infrastructure does is enabling landlords to offer services in the building and monetize them without a massive administrative burden. As tenants start to come back, they’re going to look at their options: Building A is the traditional four walls that they would have leased in the past, which now seems stale and outdated, while Building B is built-out space that has network capabilities, access controls and the complete technology stack. Even if Building B is a slightly larger investment, it will make more sense for them to take that space.
Q: essensys’ recently released report includes a chart illustrating landlords’ current adoption of flex options, possible future adoption of flex options and ruling out of flex options. Where do you see missed opportunities to meet occupier expectations?
A: Landlords are looking at the horizon. Going back to the question of what is flex, landlords are asking: “what are the things we’re willing to offer? what are the things we don’t want to take on? and what does that look like within our portfolio offering?” A couple of landlords are already pretty far down that road. If you look at the Irvine Company on the West Coast, they’ve rolled this out and are having a lot of success.
Over the next three months, we’re going to see a lot of return-to-work. The landlords that have progressed with this idea are going to win deals; tenants are going to want to go into their buildings and they’re going to occupy the spaces a lot faster. Landlords that have been sitting on the sidelines, waiting to see what happens or flat-out ignoring the move to flex, risk being overlooked by tenants.
Q: As we look at occupiers’ real estate strategies, are there areas where maybe they’re not giving themselves enough optionality to be able to take advantage of these flex offerings?
A: It’s a little bit tricky to be an occupier right now, because you have more options than you’ve ever had. The occupiers that say “this is the one thing that’s going to work for us” are going to miss out. Occupiers need to explore what their options are, figure out what volatility exists within their own industry and how that relates to occupancy inside their own real estate portfolio.
I think back to when I was a broker and working with occupiers and landlords. Their options were to sign a seven-year lease or a 10-year lease in this space or that space. There really wasn’t much planning. Today, occupiers can sit down with their broker, their representative or their real estate team and they can really start to look at how and where they’re using space. They can map out a flexible strategy that meets their space and services requirements.
Either their current landlord has the real estate products that suit their needs, or they will identify a landlord that can deliver on them. Today’s occupiers have more options than ever. The landlords who can adapt quickly to demand drivers for flex space will come out on top. Those that don’t will have a lot of catching up to do.