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Seismic structural shift about to hit the office market

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The office market is changing - and rapidly. The way tenants are occupying buildings, in particular, is changing incredibly quickly.

Michael Dean

This phenomenon can be witnessed from small companies to the very large. For example, HSBC has 15,000 registered staff at its offices in Canary Wharf, yet only 10,000 desks, with staff more than encouraged to work remotely.

Furthermore, most SME office occupiers now look very seriously at serviced options; anecdotally I know of a number of well-established SMEs opting for serviced over traditional leasing due to its flexibility, limited cost differential and superior facilities and services.

Such changes to working practices by big corporates have long been mooted but only now are they coming into force. The idea of working from home was frowned upon only a few years ago, but with studies now showing that a mixture of office-based and flexible, remote working can be beneficial for productivity, perceptions have changed.

Corporates have also capitalised on an opportunity to save costs, which has further encouraged remote working practices.

SaaS solution

Larger occupiers are also looking at fully managed solutions, with the likes of WeWork agreeing to manage a whole building for IBM so IBM can literally ‘plug in and play’.

This space-as-a-service (SaaS) solution is likely to be replicated and expanded by other SaaS providers to other corporates and will become the default option for major corporates over time. SaaS providers will increasingly contract with corporates globally to provide them with on-demand, managed services with total flexibility, unlike current landlord-tenant relationships. Employees of a WeWork customer can already go to any WeWork facility in the world and work there, but SaaS providers are looking to go further and provide even greater optionality and functionality.

Larger occupiers are looking at fully managed solutions

Major UK REITs are responding faster than anticipated to the shifting trends. British Land, for instance, has recruited Juliette Morgan to spearhead its drive to adapt to the changing market. However, the valuation profession needs to respond to this changing landscape, otherwise REITs, with quarterly NAVs to protect, may not adapt quite as quickly as one might hope.

What all this means is that traditional demand for long-let office accommodation will fall. Permanently.

Granted, the likes of Goldman Sachs will probably always want their own buildings, but take-up will be increasingly dominated by SaaS providers and lettings by landlords willing to adapt to the shift in occupier needs. Tenancies over a year in length will become increasingly rare.

ODB communal space image

Accordingly, rents for longer-term tenancies will fall. Meanwhile, landlords willing to adopt a SaaS model should benefit from enhanced NOI from the additional services and flexibility. Investment yields will adjust accordingly over time to the benefit of the SaaS landlord.

The agency community will need to adapt too. Agents will need to provide a mixture of facilities management, hospitality functions and space to occupiers on behalf of landlords. Performance will be measured on a monthly or even weekly basis. This may present opportunities - could the likes of CBRE or JLL contract with a corporate in the same way as WeWork to provide a managed solution?

If they are brave enough to take on the risks, the large firms have a real chance to dominate the future office market landscape.

Michael Dean is principal of Avamore Capital

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