By Richard Bloxam
Technology is transforming all areas of work and play, and real estate is no exception. The digital revolution is driving companies of all sizes to demand more than ever before from its real estate. Smart buildings, the development of flexible working and an increasing importance on user experience are gaining momentum in the built environment, from individual buildings up to global portfolios.
Investors must prepare for change as the very notion of an office is challenged. Those who engage in greater dialogue with their tenants – and understand that their fundamental real estate requirements are changing – will gain a competitive edge and, crucially, ensure their properties avoid future obsolescence.
How to profit from productivity
Know your tenants. Companies want to know that their real estate can enhance the productivity of their workforce, drive innovation and help them attract and retain staff. In today’s war for talent, smart buildings are a vital tool. Take Deloitte’s The Edge, in Amsterdam, as an example. Embedded technology means it benefits from significantly reduced operating costs – it uses 70% less electricity than comparable office buildings – but the heart of its success is personalisation with the provision of a unique user experience.
Increasingly, assets which provide a tangible link between property and productivity will be the most successful. Savvy landlords will be able to command higher rents, or, at the very least, retain tenants by improving the operation of their business.
As investment in smart buildings and smart building technology grows, so too does the amount of data. This data can be used by investors to guide a building’s design and management by offering insights into how people interact with space, as well as with each other. From operational tasks such as managing light, temperature and desk availability, space can be engineered to encourage personal interactions that engage employees.
The most future proof buildings will house modular fit outs, allowing spaces to be re-tooled and reconfigured easily from occupier to occupier, making refurbishments quicker and more cost effective.
A new asset class will emerge
The co-working boom is well documented and leases are getting shorter in response to more agile businesses. Space is evolving around corporate growth cycles, allowing occupiers to grow in the booms and contract during the busts. As space continues to adapt in line with tenants’ requirements, so too will office investment strategies.
By 2030, JLL estimates that 30% of a corporate portfolio will comprise flexible space. There will be traditional, strong covenants – corporates seeking Grade A space in cities – alongside smaller firms who may only ever require co-working space. In between these extremes is a need for more flexible collaboration space to satisfy changing requirements of both corporate and start-ups. To be successful, around these workspace hubs will be a network of co-working spaces, serviced offices, hotels and other liquid working locations.
To suit different types of tenant, we see the arrival of a new asset class structure in the office sector. New sub-classes will satisfy investors with differing needs and varying appetites for risk:
‘Platinum prime’ space will emerge. Not dissimilar to a bond-style investment, this is Grade A, top tier location space designed to suit the behemoths of the new business world.
Beneath this, we’ll see more equity-style, super dynamic assets – flexible, modular space, built to suit fluctuating business cycles, catering primarily to start-ups.
And, finally, a new asset class is developing through an increasing number of partnerships that marry equity with expertise to bridge the gap between institutional leasing and co-working.
Ride the wave of change
These drivers of change, although significant, will not dampen demand for office property as an investment class overall. While the traditional realms of real estate are being challenged by an increasingly complex, technology-led market, office use is rising and demand for workspace is set to increase, albeit in different ways.
However, the way investors assess and drive returns from property, as well as understand the risks involved in their portfolios and individual assets, will fundamentally change over the next 15 years and beyond. Those who actively participate in change will reap the rewards, whilst those who passively observe risk competitive disadvantage.
Investors will need to think beyond and be active in putting their office space to work.
By Richard Bloxam is global head of capital markets at JLL
