With the sunny beaches of Cannes and Mipim 2018 still fresh in my mind, I was reminded of an earlier memory of another beautiful Mediterranean resort.
With seagulls overhead, my mind wandered back to my time in the travel industry, and the lessons it holds for the office market.
As I write, we are only one more Mipim and one year away from leaving the EU. During these uncertain times, the property industry is closely managing its assets more than ever to ensure the maximisation of the yields that are available to us. The Mipims of recent years have demonstrated the lessons that property has taken from the travel industry around such yield management – principles whose importance I recognised from an early stage of my career.
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When I left business school, I was delighted to join the graduate scheme at package holiday giant TUI Travel. My first assignment was in sunny Majorca and imagine my surprise on learning that the traditional humiliation for the new boy from head office was to masquerade as the company’s official mascot… Tommy the Seagull. While this initially ruffled my feathers, as someone who searches for opportunity in adversity, I spent my summer as a seagull contemplating the economics of the travel business.
Encased in my rather warm, feathery regalia, I quickly realised that profitability in the travel sector was mostly about yield management, something that the office market hadn’t yet clocked. With a combination of high fixed costs but variable revenues, the travel business is forced to specialise in yield management.
Supply and demand
Like rotting fruit on a stall, airline seats and hotel beds are perishable goods. If they are not occupied today, they lose all potential revenue for today but retain the costs. The principle of yield management is that if capacity is fixed, price is used to regulate demand. If demand is strong, price goes up and if it is weak, vice versa.
I decided to spread my wings for the flexible office sector but, to this day, I still see offices as airlines. The workstations are the seats and if any of the workstations have not attracted the maximum revenue possible, an opportunity is lost forever.
Airlines spend a fortune plying first-class passengers with fine wine and Belgian chocolates. Although profitable, first-class usually only contributes a quarter of total airline revenue. Likewise, in the office market, grade-A stock gets much of the attention but 95% of the market turns right when boarding. Long-term leases are the preserve of first-class passengers, while flexible offices suit the needs of the majority.
In any market buffeted by short-term uncertainty and a longer-term radical shift in the way it works, less demand than supply means prices will come down
The world of work has changed forever, with the shift towards agile workplaces boosted by a number of practical considerations, including the liabilities caused by IFRS 16, and the uncertainty brought by Brexit and other fraught geopolitical tensions.
In any market buffeted by short-term uncertainty and a longer-term radical shift in the way it works, less demand than supply means prices will come down. And with the biggest source of office demand in London last year being from serviced office operators (effectively the wholesalers of the property industry), the downside risk to pricing is increased.
All commentators agree that the flexible office trend will accelerate. As flexible offices are based on variable revenue, property professionals urgently need to add a working knowledge of yield management techniques to their office toolkit.
Luckily, seagull costumes are no longer required!
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