It’s a classic good-for-the goose-and-the-gander scenario. Landlords serve themselves by serving their corporate occupiers’ needs. But those needs are changing as startups and Fortune 500 occupiers alike demand greater agility in the management of their spaces, agility that far exceeds just coworking.
According to CBRE’s Brandon Forde, executive managing director of Advisory & Transaction Services for occupiers, and Scott Marshall, president and chief development officer for CBRE 360, the complex and ever-shifting issue comes down to one solution: agility.
Marshall: “Today, the tenant might be Regus or WeWork, but their members in turn also need to abide by the rules of the building so asset value won’t be adversely affected. It’s an evolution of thinking.”
Both men sat down with GlobeSt.com recently to discuss the importance for tenants and investors alike to redefine spaces with an eye toward greater agility.
GlobeSt.com: Let’s get some basic definitions out of the way first, gentlemen. What are we talking about when we speak of agility?
Brandon Forde: In its simplest form, agility in real estate means better aligning real estate and business strategies with productivity, efficiency, flexibility and experience at the core. In other words, can you deliver a workplace that serves as a competitive advantage for your business and at the same time can ebb and flows with your business needs.
Scott Marshall: And remember, two or three years ago the concept of agile real estate didn’t exist, at least not to the degree we’re seeing today, or the realization that owners need to adapt to that demand.
GlobeSt.com: So what’s the driver of this change?
Forde: It’s coming from the occupier side. First and foremost, business is changing faster than ever. We’ve all seen the statistics that predict that 50 percent of the Fortune 500 companies will be replaced over the next 10 years. That implies some rapid change and, as a result, real estate needs to change faster today than yesterday.
There are also changing demographics, and a different kind of employee in the market today, along with a pervasive consumer mindset. Employees now want such ideals as experience, choice, mobility, wellness and community. With the war for talent, smart employers are starting to treat their employees as consumers.
GlobeSt.com: Is ‘changing demographics’ code for millennials?
Forde: There is a changing of the guard, but it goes beyond that. The consumerization of the workforce cuts across generational lines. We’re all looking for a different experience.
Finally, there are new products and technologies that enable a different way of working. Today, we can work anywhere, from the coffee shop to the airport. Plus, offerings such as WeWork and Breather and the like are making us question if the traditional 10-year lease still serves all of our clientele.
GlobeSt.com: Which certainly puts a strain on the investor/landlord.
Marshall: If the tenant is trying to recruit and retain top talent, the landlord needs to respond. Their ability to do that will simply increase their market share. But so much has changed for the landlord. Traditionally, the landlord had a good line of site into who their tenants were. Today, the tenant might be Regus or WeWork, but their members in turn also need to abide by the rules of the building so asset value won’t be adversely affected. It’s an evolution of thinking.
Forde: So, whether we’re talking about large companies or startups, how we occupied office space and structured our leases doesn’t work very well for the way we actually work today.
There’s another issue here. We’re a decade into the recovery–which itself is unheard of–and most companies have 20 percent, even 25 percent, vacancy across their portfolio. That’s a huge cost and it underscores the disconnect between need and space. Plus, there’s the utilization factor. Are people showing up for work? How does the tenant—and therefore the landlord—provide these people with an experience and the most effective and productive place to work? That’s the challenge.
Happily, many companies are further ahead in their thinking about driving culture and employee engagement, and it’s showing up in their real estate.
Marshall: Among investors too, many are enlightened. They’re helping tenants think outside the suite they occupy. They’re finding they can actually get more productivity out of the building and create a more lasting experience for the tenant than existed in the past. Landlords can drive value for the overall asset by activating the entire stack of the building to respond to tenant demand. Others are late to the dance, but they’re trying to catch up. It’s a new (and exciting) landscape where asset value is no longer just driven by rent alone, but by rent and experience, fully intertwined.
GlobeSt.com: Is the long-term lease dead? If so, what are brokers to do?
Forde: Absolutely not. Tenants are weighing the premium they’re paying for more flexibility and more experience against how that fits their overall portfolio strategy. If there’s volatility in a tenant’s demand, which clearly there is, are they willing to pay for a hedge to avoid a 20 percent vacancy rate? They might be able to cut that to 10 percent and create a better match between supply and demand.
Enlightened brokers get it. If there’s a solution that fits the need of our clients better, our job as advisers is to get as smart as we can about it and offer it as a solution. Half of our business is long-term contractual relationships with big companies, and we won’t have a very long shelf life if all we’re doing is pushing long-term leases.
Marshall: Besides, tenants aren’t abandoning an entire direct-lease strategy to go completely into an agile footprint. That may change, but this is an “and” strategy, not an “or” strategy.
GlobeSt.com: So this isn’t just coworking on steroids?
Forde: Agile real estate goes far beyond coworking. It’s about building a space and portfolio that can accommodate changes in the business and provide better employee engagement and experience. In an agile workspace and portfolio, there’s a place for long- and short-term leases and for options such as coworking.
Marshall: For the owner, obviously, the question becomes how the space is valued. What would it sell for in the capital markets and what you could buy it for based on its rental stream. The next evolution is to get the landlords to follow this trend and educate the capital markets as to what this space is worth based on the agility of its leases.
GlobeSt.com: So now the rubber meets the road. What does this mean for service providers and, obviously, for CBRE?
Marshall: Clearly, we know this space. Our agility practice leader, Beth Moore, is a seasoned professional who has worked in the occupier group and was an integral part of our own internal workplace strategy. We’ve also introduced the Agile Real Estate Knowledge Hubfor our clients, featuring the latest ideas, perspectives and guidance on the topic. We’re in a position to answer the questions that surround demand today, and to counsel our clients on both the occupier and investor side.
Forde: At the end of the day, the employee doesn’t care how the lease term is structured. They care about the experience of going to work and being as productive as they can be. We have data on this through a lot of the workplace studies we’ve done with our own company and our clients. When you move into an agile workplace, employees will report back that they’re more satisfied, even without the private offices or personal space, because we’ve given them a more critical type of experience. And more than 90 percent say they won’t go back to the old way of working. In short, we’re well-positioned to help clients navigate this changing landscape.