By Businesses’ needs are shifting rapidly — and commercial office landlords are facing challenges as a result.
As flexible working transforms from a rare perk to a mainstay of work post-pandemic culture, more companies are operating on hybrid models than ever before.
For office landlords, this has led to floor space demand falling significantly.
In the UK, 1.8 million square feet of office floor space was taken out of service last year — the equivalent of 250 football pitches.
While this is a healthy indication of the market contracting to meet changing needs, it is of concern for landlords, nonetheless.
A fall in demand combined with global market instability has led to devaluations of assets, while high borrowing costs and supply chain shortages inhibit future development opportunities.
Even though landlords have certainly already adapted their business model post-pandemic, they must make further structural and operational changes to respond to new user demands.
Rather than treating their business as a ‘wholesale’ operation, in which several floors of workspace are leased to one company for many years, office landlords should take the ‘retailer’ approach, offering a range of workspace products, including flex space, traditional offices and varying lease lengths, to adapt to the needs of a contemporary workforce.
Inflexible, traditional workspace leases cannot meet the needs of many businesses
Like landlords, businesses are facing volatile markets and are subsequently unwilling to commit to the same lease terms that were previously considered to be standard.
Within the past ten years alone the business world has witnessed a global recession, seen tremendous growth and recovery, entered a world-altering pandemic and is now on the path to yet another impending recession.
During this time, thousands of businesses have risen and failed, or seen dramatic structural changes.
It is simply unrealistic to expect businesses to be locked down by lengthy leases when they cannot anticipate any aspect of the future.
Many employees are experiencing weakened job security in the current economic climate.
Indeed, even tech giants like Meta are cutting staff numbers and downsizing their office space in favour of flexible options.
Agreeing to a rigid, decade-long lease in the current market is therefore not only an unwise decision for businesses but a potentially fatal one, particularly for smaller businesses without the funds to weather the storm.
Flexible leases in spaces with the capacity to scale with their occupier become a far more attractive option.
There is also the matter of shifting expectations; post-pandemic, working culture has become employee-led, with flexible, remote and hybrid working becoming a commonplace practice as staff seek to embrace work-life balance.
Indeed, it has become so prominent that hybrid working is becoming cemented into legislation by the UK parliament, ensuring that employees can request it when starting a new position.
Many businesses therefore no longer require a desk per employee such as in a traditional space and are instead drawn to scalable, adaptable spaces that can accommodate hybrid workers as necessary.
Workspaces must be able to adapt to these requirements; a traditional workspace occupied by a single tenant that undergoes little evolution for several years is unlikely to address the transforming needs of its users.
How landlords can thrive in this changing market
The fact remains that demand for traditional offices has dampened — yet demand for other categories of workspaces remains strong.
In fact, flexible workspaces have seen occupancy rates rise to 90% since the pandemic.
So, how can office landlords reassess their approach and boost occupancy?
The solution is simple: diversifying their product range. Variety is paramount; no longer can landlords expect each tenant to be content with the same sliced white bread.
Some of us like sourdough, others enjoy granary, and many change their mind day-to-day but appreciate having options.
Evidently, other industries operate successfully by offering a competitive variety of products for their consumers to choose from- why shouldn’t office real estate benefit from the same approach?
In this sense, landlords should consider moving away from an outdated ‘wholesale’ mindset of leasing several floors to a single company for many years.
Behaving more like a ‘retailer’ by incorporating a variety of workspace products – a combination of traditional and flexible workspaces of varying sizes and lease styles – will attract a wider scope of prospective tenants. Anticipating the needs of a growing part of the workforce will be landlords’ salvation.
Diversifying their offering is a landlord’s best option
After decades of income stability, landlords are naturally daunted by the novel prospect of more products, more tenants and shorter leases. Rather than shy away, landlords must view these changes as an opportunity for growth and innovation.
While a five-year or decade-long lease may initially appear to afford landlords a stable income, shorter leases encourage landlords to keep up with implementing the latest workspace innovations and stay competitive.
State-of-the-art spaces are highly sought-after in today’s market, and shorter leases allow landlords to react swiftly to demand.
Flexible leases also enable landlords to source tenants quickly and easily as this increasingly aligns with companies’ modern needs and poses less of a daunting financial commitment.
Introducing new workspace products into a building is an undervalued method of diversifying its value and stability.
With any investment, placing all of one’s eggs into one basket bears significant risk, as many landlords experienced during the pandemic when some occupiers were unable to meet their lease terms.
As a recession draws closer, a ‘retail’ approach with diversified income streams would allow landlords a level of security and certainty.
What’s more, adding an element of flexible workspace has even been demonstrated to increase the value of an entire asset; the Greenstreet Office Insights Report recently showed that a ‘well-managed flex office asset warrants a roughly 10% valuation premium’ when compared to traditional office space’.
Understandably, minds may fill with the potential chaos of more contracts, legal work and sales grinding — yet this need not be the case.
Working with a flexible workspace provider, which would manage tenant procurement, implementation of infrastructure and operations where desired, streamlines an otherwise challenging transition for commercial landlords and enables them to meet the rapidly shifting needs of the modern workforce.
Despite much doom and gloom that has entrenched the commercial real estate industry, landlords need not accept defeat.
While devaluations and instability are a natural cause for concern, landlords who embrace shifting working culture and meet demand for a variety of workspace products will be the ones who see real returns in an otherwise challenging market, including raising their asset’s value.
It does not need to be a difficult transition for landlords, as it can be smoothly facilitated by flexible workspace providers.
The solution is not so drastically different to other industries; staying competitive is key, and in today’s market, that means pivoting from ‘wholesale’ to ‘retail’.
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