Research

Real Estate is Broken

August 21, 2020
Steven McCormack
5 min read
A Sublime Solution

We have a frustrating relationship with our workplace environment. Our day-to-day needs and wants are often frustrated by poor process, a lack of control and uninspiring design. To help illustrate my point, we shall run through some workplace scenarios that we face in our daily working lives:

Monday morning. We are commuting on congested highways or stuffy public transport. Now we are running late for a 9:00 am meeting. We rush to the office to use the little time we have to print out paper agendas and finalise slides. The lifts are 'temporarily' out of order. We cannot find a hot desk. The printers are down (no one can explain why or for how long). Our security pass is not yet activated for the third floor. We want to scream.

Tuesday, 12:30 pm. We have arranged a lunchtime CPD session with an industry specialist. Upon her arrival, reception staff do not have any details of the visit. We insist an email was sent on Friday. After fifteen minutes sorting out security access, we finally enter the booked meeting room. There is only forty five minutes left of our slot. We are setting up for the presentation; but her laptop connection is incompatible with our projector. At least she brought free sandwiches.

Wednesday afternoon. We are starting a new project, and want a ten minute catch up with the other team members. Nothing formal, just a chance to introduce ourselves in person. There is no suitable space, other than a grubby breakout area, so we look for a quiet café instead. Twenty minutes later, and we have finally found a place down the street and bought our coffees. Ten minute catch up finally commences. Next time, we will just send an email.

Thursday, mid-morning. We are writing a potentially career boosting business case. We would prefer some stimulating, comfortable space as we form a robust argument, outline our proposals in detail and carefully select the right language. Instead we have a fixed workstation, a crowded office and a clinical aesthetic. We resign ourselves to completing this at home over the weekend; we re-arrange our commitments to family and friends.

Friday. Our 'by the end of the week' deadline is fast approaching. The lifts are still 'temporarily' out of order. The internet enjoys a leisurely pace and is not usually known for its reliability. The light above you has been flickering for days. It is a refreshingly mild November, but the office heating is set at volcano level. We give up and crawl under a rock.

Workplace Isn't Working

These are only a small flavour of the various irritants and friction present within our workplace today. Whilst some are admittedly minor, others can contribute to mental health issues and sick building syndrome, a medical condition attributed to poor indoor environments. Collectively, they create an experience that is entirely out of sync with our wider consumer expectations. To paraphrase Saatchi & Saatchi; workplace isn't working.

Our workplace environment is partly a reflection of the commercial landlord and tenant relationship. Disjointed and adversarial in nature, each party has traditionally sought to 'protect their position' with onerous lease definitions, terms and conditions.

Each building and lease is obviously subject to its own characteristics and local market conditions. Consider however the example of a typical, UK multi-occupancy office. An institutional landlord's role can be pleasantly passive. Let out a space, collect the rent, refresh the reception, operate the lifts, observe the law, maintain the building fabric etc. Motivation is, quite understandably, focused on supporting rental yields and capital values. Maximise gains with minimal intervention.

In theory, a tenant has the freedom to create a space that aligns exactly with their business goals and aspirations. But not many organisations have the financial muscle, supporting data, specialist knowledge or sufficient time to implement bold new visions. They have to watch cashflow and carefully navigate lease obligations and landlord approvals. Then there is the potential repair or reinstatement liabilities at lease expiry. Ultimately, most tenants are incentivised towards safe and conservative workplace practices. Traditional market dynamics frustrate collaboration and holistic thinking.

Occupant experience is not the priority.

Fundamentals Are Shifting

It can be exceedingly difficult to create a seamless, consistent service throughout the workplace, which extends well beyond the walls of a demised office space; consider how building operation and maintenance is carved up between parties with infrequent interaction.

Say for example, you note that common toilet facilities are grubby, faulty or aesthetically tired; they do not present well to potential clients or sought after employees. You cannot as a building user just pitch up, organise a refresh and claim the expense from the landlord. The process is slow and arduous; report the issue to your office manager, who then reports to a very busy property manager, who is valiantly trying to manage one zillion other tenant requests.

It is perhaps no surprise then that market fundamentals are shifting. Commercial lease lengths have shortened considerably; from fifteen or twenty-five years down to four or nine years. There is a clear demand from occupiers for more flexibility, better service and less financial commitment. Landlords have responded to a degree with financial incentives; break clauses, service charge caps, rent free periods and fit out contributions are all commonplace. Yet this is just the beginning.

The generational, technological and cultural transformation we are witnessing is now questioning the very meaning of work itself. There will of course be ups and downs, winners and losers, regressions and accelerations. But the end result will be a markedly different real estate landscape from the one we are familiar with today.

Space-as-a-Service

Where the dust finally settles is very much unknown. We already have one potential answer; enter the coworking, flexible office phenomenon. These space-as-a-service providers offer an alluring experience to those who crave an alternative to the traditional office. Originally attractive to freelancers and startups, paying customers now include corporate consulting giants.

So we are all settled then? Landlords should just cosy up to these young upstarts, and sleep easy? Evidently not. The failed WeWork stock market flotation has put to rest the idea that companies can expand at breakneck speed, ignore financial viability and simply hope for the best.

That said, there are reasons to be very, very cheerful. The workplace is an incredible concept; it is a place for people to collaborate, interact, build relationships and learn. This will never change. We now have a demonstrated product-market fit between high quality, experience driven real estate and the occupiers who want to use it. The business models and organisations that drive this forward may chop and change, but the underlying workplace principles will not.

And what of #proptech? A clever marketing strategy, for sure. A mini dotcom bubble, possibly. A fad that will fizzle out with time, absolutely not. We have a collection of entrepreneurs, whiz kids and generally very smart people. They see the glorious exception of traditional commercial real estate and accept the challenge to disrupt. Collectively, they are working hard to resolve the property pain points and friction we experience almost every day.

Consider the privileged position of the asset owner. With total control of a property, there is the opportunity to craft an occupant experience tailored to suit a particular user group; think maker spaces, start-up spaces, learning spacers, assisted living spaces, healthcare spaces. The list is endless. Coupled with the right mix of #proptech solutions, an owner-operator could provide the seamless, personalised and on-demand experience that we have come to expect elsewhere.

And some final, perhaps leftfield, food for thought. Consider Nassim Taleb's concept of antifragility, and his example of the office worker vs. the taxi driver. The former has one source of steady but guaranteed employment. The latter has an uncertain but large number of paying customers. Who is best placed to withstand a large shock?

To clarify within a real estate context; what asset is best placed to absorb economic volatility? A highly leveraged, traditionally leased office block, which relies on the financial health of multi-national tenants? Or a community owned, experience focused workplace, which has built a strong brand amongst a range of independent business, social enterprise and frontline services? The answer depends on your worldview. Is your preference for passive assets and static rent? Or civic anchors and dynamic income?

Signing out, Steven.


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