Real estate investors’ strategies for a flexible future
Our Property Futures III – A Flexible Future research has identified the issues occupier flexibility poses for investors. Namely, that shorter-let property has underperformed over the last decade, and (assumed) rising flexibility for occupiers in the future thus poses a particular problem for investment returns – albeit we are seeing evidence of rental premiums for flexibility in some segments.
It is easy, of course, to identify problems. It is far less easy to come up with constructive solutions. Nevertheless, in this third blog on the research, we look at some solutions.
Most prosaically, investors need to ensure that when a tenant fails to renew a lease they are able to fill the property with a rent-paying occupier quickly, and with low transaction costs. We would boil dealing with this down to a number of key areas:
- Matching occupiers to appropriate real estate more efficiently,
- Smoother tenant transitions between spaces,
- Making leases less complex and more service-inclusive, to keep negotiating points to a minimum.
In terms of matching tenants and properties more efficiently, a number of technology-led solutions are emerging. For example, software platforms, such as Rialto and VTS, allow agents, developers and landlords to view their leasing activities and portfolios in real-time with the objectives of driving greater transparency and efficiency in leasing and management.
At the same time we are seeing great strides taken in facilitating easier moves for occupiers. Liquid Space, an online platform that functions rather like an Airbnb for offices, uses the web to connect those looking for space directly with those looking to provide it. Also speeding up the process of taking space by means of a proprietary license agreement that allows legal complications and delays to be removed.
Meanwhile, even major office landlords in the UK are increasingly looking at providing more plug-and-play type space for tenants. A wise move, given that we believe those occupiers taking conventional leases for a few years will increasingly demand more inclusive, hassle-free contracts. Indeed, we expect landlords across all sectors to increasingly offer a more hotelier-type service – occupiers want to get on with business; not worry about dilapidations.
Finally, there is of course the much-discussed Blockchain – the technology that underwrites Bitcoin and other crypto-currencies but from which far wider applications are expected. For example, the Cambridge Innovation Centre (CIC) in Rotterdam – a start-up hub for innovation companies – is working with the city of Rotterdam and Deloitte Netherlands to develop a Blockchain-based app to record lease agreements, enabling both the city and companies housed in CIC office space to conclude contracts for space faster and more efficiently.
Will all this be enough to cope with the rising tide of flexibility? Perhaps. And those investors that get on board early may see strong outperformance versus their peers, based on the premise that proactively meeting occupiers’ service needs will drive premium rents.
However, those investors who tackle not only today’s slightly clunky (and costly) leasing process, but also seek to leverage technology and placemaking into their tenant retention strategies – thus avoiding said process in the first place – are likely to be the ones who outperform on a sustainable basis.
What does this involve?
Placemaking is a somewhat overused term with occasionally fuzzy connotations, but, like ‘wellness’, it can be a real value-driver when looked at on a practical basis. Our Office Futures research in 2016 looked at what London employees wanted from their office location. The first answer, “commuting time”, was rather obvious. However, the second, “food and drink options”, was something that is just coming to the fore. Moreover, what comprises a good food and beverage offer is debatable. King’s Cross is an example of a wider area in single-ownership, albeit between a few parties, where a mix between traditional leased restaurants and street food vans has made an active contribution to wider-value. The area is now one of London’s most expensive office markets, with prime rents of around £80 per sq ft.
Bringing ‘Big Data’ into the mix means we increasingly have the data at our fingertips to come to informed decisions about the strength of trends in the market, although we should be cognisant of the fact that having lots of data and having better data aren’t mutually inclusive. The chart below, for example, shows Google searches for ‘street food’ over time. This sort of data can allow us to judge trends in real-time, as opposed to getting collated data at a later date – at which point the opportunity to outperform is less.
This is just one of Big Data’s practical uses going forward.
In reality it has applications throughout the built environment and should be seen as critical in the battle to retain tenants at lease-expiry.
For example, the data produced by smart office buildings will enable occupiers to track floorspace usage over time in great detail, using the insights produced to achieve far higher levels of space efficiency and productivity than currently achieved.
On the surface, this new tenant efficiency would seem disadvantageous for landlords, given its possible translation into lower space demands; however, the flip-side should be a far better understanding of occupiers’ demands and an early warning system of the likely changes in said demand over time while, most importantly, building a two-way relationship with tenants that provides value to both sides.
In the retail sector, investors have long had better access to data and use it extensively. Retailers themselves are increasingly tracking the movement of shoppers within their own stores using customers’ smartphones’ Wi-Fi signals to enable them to understand shopping patterns. And at the shopping centre asset level, landlords are increasingly using indoor location services to help customers move around centres effectively and help tenants to target those customers with promotions. We expect the owners of shopping centres and retail parks to increasingly engage with their tenants to share data, enabling a more coordinated approach to optimising shoppers’ journeys.
Looking further into the future, with retailers increasingly using RFID technology to fully track their merchandise at both the warehouse, delivery-stage and store level, it is not beyond the realms of fantasy that one day you will be able to walk into a shopping centre, ask a landlord-managed app for a white shirt with size 16 collar, and get a list of products, prices and in-centre retailers ready to supply it. This sort of innovation could prove vital in helping retail tenants compete, and seamlessly interact, with online retail, and make sure their short leases and investors’ poor investment returns do not end up being mutually inclusive.