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Flexibility the key to the future
Currently most offices are still largely traditional, with the tenant committing to a multi-year lease with limited options to expand or contract during the committed term. In the most mature markets flexible workspace represents up to 7% of total office stock. London is leading the charge on this front with 6.9% of all office space being consumed on a “As a Service” model, followed by Amsterdam (6.3%), San Francisco (4.7%) and New York city (4.5%).
As a comparison Auckland sits at less than 2% with the entire flexible workspace supply of New Zealand representing less than 1% of total office stock. These levels however are set to explode over the next decade with global real estate firm JLL predicting that flexible workspace will represent 30% of total office stock by 2030. The increased demand combined with an overall increase in vacancies have led commercial property owners to further look into partnering with operators to provide the amenities that tenant want through partnership models, be it management agreement or franchise, or getting into flexible workspace management themselves.
But with limited track record to assess the benefits of partnership and even more limited expertise in the market to deliver in house, how can landlords assess how to best leverage this shift in customer requirements?
The key to flexible workspace is to consider the provision of office space no longer as a leasing model but rather a service model. The key drivers for demand from an occupier perspective are:
The list of benefit from a tenant side goes on and it is no wonder that the global players in the industry have reported historical demand in the recent months. With the benefit for tenant being clear there is no question that landlords who provide flex in their buildings will outperform their peers. Between the options of outsourcing the management to existing operators or creating in-house ventures how can landlords assess which solutions are best suited for them to deliver flex amenities to their tenants?
In recent months we have seen an acceleration of franchise partnerships signed by global flex space providers which further demonstrate the growing appeal of this model. But is outsourcing the best solution for landlords? We have compared below the two scenarios:
The main benefit of outsourcing to an existing operator is that it is easy, typically quicker than setting it up yourself (Although not always the case) and will generally deliver a return faster given the existing operator will have customers on their books already.
However, it can also be costly – most providers charge 10% to 15% on gross turnover – it provides less control especially for integrating the flex component to the overall leasing strategy of the building, and it can be more hassle depending on the quality of the provider.
It also can be difficult to manage risk given the operator will often demand full freedom to run the operation under its business model and will be less capable of adapting to specific requirements. For example, it might be beneficial for a landlord to offer a highly discounted rate for a large portion of the flexible workspace in order to accommodate a large lease over the balance of the building, but the flex space operator may not be inclined given this would not be beneficial for their operation. Outsourcing also gives much less visibility as the knowledge of the customer base remains with them.
Furthermore, in the context of New Zealand there is limited numbers of flex space providers with depth of expertise with IWG being the only operator providing solutions to both corporates and SMEs. Partnering with global providers can be difficult when they typically invest limited resources into understanding the local market.
The best local example of a successful in-house operation is Precinct Properties’ Generator co-working. The integration of the co-working operator into Precinct’s operations has enabled them to retain a competitive advantage by providing seamless integration between the traditional leasing and flexible workspace offering. When thinking about in-house operation landlords should consider the following key metrics:
So, what does a typical operation look like from a number’s standpoint? Our analysis below provides average financial forecast for typical flexible workspace operations in the Auckland region for an A grade asset. For lower grade assets the mechanics are the same except the cash payback may be longer given the increased ratio of fit out cost to rent. The long-term margins however tend to be higher depending on the level of service revenue.
Note the figures below have been adapted to reflect a landlord operator situation:
This will heavily depend on how the operation is set up and the extend of current resources. If we look only at marketing most operators spend between $10k and $20k per annum on marketing with a one off spend for pre-opening marketing of $15k to $20k.
Overall, it is clear that the owner/operator scenario delivers more benefit for the owner provided expertise can be sourced to help with the strategy, design and construction of the site. Although it is a relatively simple business to operate there are key errors that must be avoided in the planning stage to ensure strong returns are achieved.
If you are a landlord or a tenant with surplus space wanting to explore what flexible workspaces could do for your business, we can certainly help. We have the strongest expertise of any New Zealand firm in this regard employing experts with over 20 years combined experience – Pierre Ferrandon – Gwynn Hoskins
If you would like to know how we can help you get in touch with us for a chat.
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