Service providers have entered the real estate sector on the back of the rise in the service economy, sitting between the landlord and the tenant. The latter generally no longer signs a long lease and increasingly takes on less of the occupational risk, such as being subject to market rent reviews and paying for maintenance and dilapidations.
In the hotel sector, the concept of owner, operator and user has been longstanding. In offices, serviced and flexible office providers, such as Regus and WeWork, which are happy to sign leases or, increasingly, management agreements (as hotels did in the past), have made the service concept more prevalent.
The concept also appears in self-storage, student accommodation and residential but in industrial – apart from third-party logistics providers, which service one client from a facility – it has not reached the bulk of tenants: the SMEs occupying smaller units.
However, the demand from SMEs is there. They want the same things they can get when they rent an office and they are willing to pay for it. I am therefore very confident that service provision will happen in the multi-let industrial (MLI) space.
While there are already owner-operators, there are no pure operators and you could argue that the current industrial platforms are not as sophisticated as those in the office or hotels sectors. The most advanced is, arguably, Stowga, which, rather like Neighbor in the US self-storage sector, acts as a marketplace, connecting businesses that need additional flexible warehouse services with suppliers that meet their criteria and requirements.
The challenge for MLI owners is to change their business model to be able to start servicing their customers. This requires a completely different approach and way of thinking to running real estate, with fewer surveyors and more traditional ‘non-property’ roles, such as sales, marketing and technology staff. For example, one leading student accommodation owner-operator has four times as many IT staff as it has surveyors.
Operating platforms are hard to develop without assets (unless you have very deep pockets), so we landlords have an advantage. But in time, the pure operators will come – and when they do, their scale may make it very difficult, or even impossible, for landlords to compete with them. We have seen this in the serviced office market, where WeWork has dominated, and only now are many of the incumbent landlords trying to respond – but I believe it is too late.
So what does this mean for MLI landlords? Our choice may become between partnering with an operator or reverting to being a passive investor in the underlying asset, with the operator creaming all the excess profits from good management.
The latter leaves little room for differentiation, but perhaps is more akin to where we were in the past with 25-year FRI leases. That might suit some, but at Stenprop we are aligning our business with the needs of our customers with a view to reaping the rewards that will bring.
Julian Carey is executive property director at Stenprop
Industrial & logistics supplement
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