Are you ready for the impact tech is having on workspaces? We have the insight on what this means for investors
How investors can ride the wave of tech-driven change
FUTURE PROOF PROPERTY
Ride the wave of tech-driven change
Future proof property
Fixed, immovable and, in many cases, illiquid, real estate is traditionally slow to respond to change. Technology is not. It’s impacting the way people work and the nature of business itself and this is playing out in the built environment, from individual buildings right up to global portfolios.
In a new report, Workspace, reworked, JLL explores the effect that tech, data and digital disruption will have on the real estate investment market as well as on investors’ strategies and portfolio structures.
Read on for a summary of the paper. It’s time to prepare for the digital disruption of real estate.
Robo advice, virtual reality, artificial intelligence and bitcoin, all innovations that were once reserved for the realms of science fiction have emerged in the business world in recent years and are already playing out in real estate innovation and demand. Disruption is already taking place as new organisations leverage new technology and occupier trends.
Technological innovation and its adoption into working and social life is creating new working patterns and company structures; these, in turn, are placing fresh demands on workspace to be flexible and facilitate collaboration.
The rise of the smart building – facilitated by the Internet of Things, ubiquitous connectivity and a plethora of data – puts real estate at an inflection point: can a building be improved to maximise employee wellbeing, productivity and foster productivity.
Over the next 15 years, workspace will become increasingly polarised, a new class of ‘platinum prime’ space will emerge as the top tier of the asset class, least volatile and increasingly scarce. Beneath this, a growing cohort of super-dynamic assets will offer more risk but greater capital growth opportunity. A whole new sub-asset class will also emerge, bridging the gap between institutional leasing and co-working.
We are at a crossroads and investors will need to be able to ride the wave of tech driven change to build portfolios that stand the test of time.
You're only as smart as the buildings you invest in
How to profit from productivity
The success of real estate assets will increasingly depend on how they adapt to the changes being brought about by technology.
Central to this is how data will be used to design and manage buildings.
Corporates today want to know that a building can improve and maximise employee wellbeing, as well as enhance productivity and foster innovation, and real estate owners and investors must engage in greater dialogue with their tenants to better service their requirements.
Assets that are not fit for these changing operational needs could see waning levels of interest.
Data will enable property owners and asset managers to optimise occupancy and inform design. Automation and Building Management Systems will allow building owners to monitor an entire portfolio and fine-tune building performance. Smart buildings have, until recently, focused on relatively operational tasks, but the technology now coming online allows for real gains to be made in sustainability and cost management. It will also be used to attract and retain workforces and boost productivity.
"Building owners forecasts smart building technology spending to grow from US$6.3 billion in 2014 to US$17.4 billion in 2019."
International Data Corporation (IDC)
Evidence & impact
The adaption of smart technology by building owners has already increased significantly. Deloitte’s The Edge, in Amsterdam, is an overused but nonetheless relevant example because it has put personalization at the forefront of its design. Equipped with more than 30,000 sensors, employees are connected to the building via an app on their smartphone, which helps them to find parking spaces, desks or other colleagues, and report issues to the facilities team.
The Edge, Deloitte HQ, Amsterdam (PLP Architecture/OVG Real Estate)
LED lights in the building are powered through low-voltage Ethernet cables and are equipped with monitoring sensors. The Building Management System can adjust the lighting and heating in vacant parts of the building. As a result, The Edge uses 70 per cent less electricity than comparable office buildings.
As well as reducing costs, smart buildings can provide a tangible link between property and productivity allowing landlords to command higher rents or at least retain tenants by offering a return in kind through occupier efficiency gains.
Managing greater amounts of workplace and workforce data brings added risk, making data governance and management a key requirement. This includes the need to embed cyber security in Building Management Systems and put in place privacy safeguards.
"Smart buildings will allow landlords to command higher rents and retain tenants"
Designed by data
As the desire for flexibility permeates office buildings, space will be expected to adapt quickly to cater to tenant demands. Data will cement the link between the strategic aims of a business and a building’s design, making fit-outs and refurbishments quicker and more cost effective, as well as cutting capital expenditure when a lease ends.
Evidence & impacts
IT company Cisco’s Connected Workplace design standard to attract the right employees yielded impressive results on the cost effects: a 50 per cent reduction in cable, IT and furniture CAPEX and a 30 per cent reduction in space required per person.
"Average desk space has declined to 150 square feet or less, down from an average of 225 in 2010. Respondents in the 2013 survey expected an average of 100 square feet or less by 2018."
Using data to analyse tenant behaviour and requirements will give landlords a competitive edge in helping occupiers to manage more fluid workforces. Building owners will come under more pressure to offer solutions around the efficiency of occupancy but tenants will often pay higher rents for the right space.
Open architecture design standards and the interoperability of their assets will in turn facilitate easier digital and physical updates.
Are you using data to analyse tenant behaviour?
RESPONSIVE REAL ESTATE
Put your office space to work
Changing tenant demands
We have already seen many of the trends that will define the future of real estate begin to play out in certain sectors. The boom in co-working is already well underway, as is a trend towards shorter lease lengths, reflecting both the change in how businesses operate and how technology is facilitating different ways of working.
Lessons from retail
The growing influence of technology and the manner in which it can disrupt real estate markets is well established in the retail sector. Driven by the consumer, ecommerce is capturing an increased share of planned shopping trips, leaving traditional retailers to redefine retail and to create offline experiences to compete.
Similar trends are becoming evident in the office sector. Technology has fundamentally changed the location and use of office space. For example, cloud computing and mobile technologies have enabled remote working whether that’s from home, hub offices or across timezones.
"By 2030, 30% of the average office portfolio will comprise flexible space."
Evidence & impact
As online retail has reduced the level of spending in physical stores, retail landlords now offer more flexible rental contracts and smaller store sizes to cater for different shopping experiences and other operators such as food, beverage and leisure businesses.
Office investors would do well to look at the retail sector for a glimpse into the future. As technology has increased mobility and attitudes to work/life balance change, workspaces will be expected to offer a mix of designated space, unassigned seating (‘hoteling’), social and community spaces as well as other amenities such as fitness and leisure facilities.
The disruption in the office sector will drive the polarisation between prime and weaker secondary locations. Developments may be let to a mix of different tenants on multiple lease terms: large, secure anchor tenants will underpin income with further streams stemming from ‘churn’ occupiers, who will be charged more per square foot.
New corporate leases
The new commercial real estate landscape is increasingly dependent on its ability to service organisations of all sizes. While some large corporates will provide traditional, strong covenants (although some may choose to owner-occupy), many are likely to need less ‘core’ space than in the past. Smaller firms, meanwhile, may only ever need a co-working space. In-between these extremes is a need for more flexible collaboration space to satisfy changing requirements of both corporates and start-ups.
Evidence & impact
The pace of change in business has accelerated. The speed of growth can be rapid and so can the pace of decline. Technology has fuelled innovation and leases have had to adapt. Figures from the BPF show that average lease lengths for the UK office sector have been on a downward trend since the early 1990s.
Investors and owners will respond to shorter business cycles by working with new tenant types and offering more flexible space.
Smaller, and fewer, core spaces will be fitted out to a high digital specification and situated in city centres, served by public transport, to tap into deep networks of skilled individuals. Around these hubs will be a network of spokes comprised of co-working spaces, serviced offices, hotels and other flexible and liquid locations for staff to work from.
Around these hubs will be a network of spokes comprised of co-working spaces, serviced offices, hotels and other flexible and liquid locations for staff to work from.
One of the most important issues for landlords is reacting to the changing and more demanding needs of a new type of tenant. Under the right conditions there is opportunity for more flexible owner/occupier relationships. Of course, this relies heavily on market dynamics.
It is already evident in the tech industry; companies are asking landlords for non-traditional office space or flexible lease terms; they simply do not know what their business will look like in 12, 24 or 36 months.
Evidence & impact
Valued at $10 billion in 2015, WeWork aims to have a portfolio of 80m square feet globally by 2020. Its model operates by leasing floors and then charging monthly memberships to start-ups and small companies. This trend is particularly pronounced in the US.
In Chicago, the number of shared workspaces (accelerators, incubators, co-working and executive suites) almost tripled between 2013 and 2015 to 88 locations (2.1 million sq ft). This type of space is increasingly situated in up and coming areas.
Agora co-working office space, Berlin
Growth in rents in previously non-traditional areas in London, such as Kings Cross and Shoreditch has outstripped traditional financial centre locations. In the Kreuzberg area of Berlin, many start-ups occupy once dilapidated brick warehouses. The average annual rental in this submarket has increased by 64 per cent in the last three years compared with 16 per cent for prime office space in Berlin.
Critics of the co-working movement claim that some models are overvalued. However, the underlying trend is clear: businesses want flexibility. Many models will materialise to meet this demand; more sustainable, and scalable platforms will evolve, whereby developers and landlords work together on a profit share basis.
By 2030, 30% of an investor’s portfolio will comprise flexible space and investors will need to restructure their portfolio to profit from this trend. And the profits should not be underestimated.
Partnership arrangements will become commonplace as owners seek the expertise required to tap into this trend. Already, British Land has a profit share arrangement with co-working provider ‘Central Working’ to provide flexible space in a number of British Land buildings.
Landlords will have to ensure assets boast the best fit-outs, connectivity and amenities to continue to attract occupiers given that the aggregate demand for traditional office space may reduce.
How much of your portfolio is flexible space?
- Less than 20%
- 20% - 30%
- Over 30%
Technology is changing the workplace. Are you ready?
A new era for real estate investment
Redevelop and make connections
The changing demand for real estate will drive real estate owners to take a more active role in the design, development and connectivity of their assets.
Redevelopment is the new development
As technology enables work environment transformation, the demand for commercial real estate space will develop and respond in line with changing occupier preferences. Instead of creating more space in urban areas, for example, it will not be unusual to see class A office space housed in obsolete industrial assets. This trend is already established in a number of major European cities where redeveloped warehouses or former factory space have bee repurposed.
Office buildings that were obsolete due to poor technical specifications have been revitalized. Previously unoccupied space in urban areas, such as railway arches and industrial units, can now be connected to high-speed broadband without major upheaval.
"Investors will choose whether to deploy capital in high spec built-from-scratch smart buildings, or rejuvenated assets."
Evidence & impact
In Europe, the tight market conditions in many cities have accelerated opportunities for repositioned and redeveloped assets. For example, in Amsterdam East (a secondary location), one office asset from 1974 was repositioned in 2014 through full redevelopment, which focused on a high tech fit-out, flexible floor plates, a range of leisure and hospitality amenities and highly flexible leases. Gross rental values increased by 40 per cent.
A two-tier market will emerge whereby investors choose whether to deploy capital in high spec built-from-scratch smart buildings, or rejuvenated assets. Both of which offer a blank canvas to entice occupiers with the highest specification fit-outs. New developments are clearly capital intensive. However, even in redeveloped assets, investors will increasingly be expected to cover costs of non-negotiable infrastructure as they seek to future-proof assets. The deployment of specific technology, will, in many cases, be borne by occupiers.
Connected real estate
In low-growth environments, investors should anticipate a growing disconnect between cities, and even specific urban areas within cities, that have the capacity for reinvention and the ability to harness the opportunities that arise from technology, and those that don’t.
In an environment where cross-border investment and the trade in goods and services are becoming increasingly global, the question of connectivity is highly relevant. Technological infrastructure will prove a major factor in location decisions. Investors will choose assets in cities that combine so called ‘hard connectivity’, which relates to physical infrastructure, and ‘soft connectivity’, which relates to social capital such as digital adoption, education and quality of life, as well as cultural amenities.
The cities that have succeeded the best in terms of hard connectivity are those that rely on a mix of planned and organic growth. Hong Kong and Singapore are good examples of cities with intelligent choices in infrastructure, which have contributed to their attractiveness as investment destinations.
Much of the evidence of soft connectivity is anecdotal, but exponential growth in popularity and, therefore, pricing in recent years points to the benefits that density of cultural amenities can give to locations such as Williamsburg in New York or Shoreditch in London.
Evidence & impact
161 Bowery Getty
In terms of hard connectivity in real estate, owners who invest in improving the technical infrastructure of their sites will find them easier to let. When Caspi Development acquired 161 Bowery building in New York, they invested in wiring fibre connections from the outside plant to every floor in the building. Not long after the renovations were complete, tenants flocked to the newly WiredScore-certified building. WiredScore rates office buildings according to the speed and reliability of their Internet connections.
Cities that have addressed hard connectivity have been the most successful. Those that can address the issue of soft connectivity in the 21st century will stand out as destinations not just for human capital but also for investors. Dubai is a good example of a city that has, in a short period of time, excelled at hard connectivity and now seeks to address soft connectivity issues.
Smaller cities (such as Stockholm, Berlin, Boston, Melbourne) will add to the competition of the established ‘Big Six’ – London, Paris, New York, Tokyo, Singapore and Hong Kong – as globalisation, urbanisation and the proliferation of technology challenge this hierarchy.
Kreuzberg, Berlin Getty
Locations that foster innovation through their mix of fundamental economic strength, high levels of transparency, ease of doing business, green credentials and connectivity, will rise to prominence and investors must adapt their strategies to include these locations as part of a global portfolio. Increasingly, investors must also pay greater attention to cities that are able to analyse and use data sources to improve productivity, the environment and sustainability: true Smart Cities, where tech is an enabler.
Have you increased and refocused redevelopment activity?
THE MARKET REWORKED
A new market dynamic requires a fresh mindset
Ride the wave of change
The question remains around what all of this technology, and the resulting flexibility and mobility of tenants, does to the development and investment process and, ultimately, values. A world of short leases implies shorter income streams, less predictability and perhaps less security as fewer companies will have a solid credit track record.
Will these drivers of change dampen demand for office property as an investment class overall?
Based on current market conditions and investor mindset, the answer is no. While the notion of an office is being challenged, office use is rising and demand for workspace is set to increase, albeit in different ways.
As we have seen, new sub-asset classes will emerge with core workspace sitting at the top of a spectrum that will include flexible space, multi-use developments and shorter leases. Portfolios will increasingly need to consider opportunities to target capital in changing working patterns and locations. While data is increasingly used in working environments and workspace design, it will also become a greater part of the investment process.
Successful investment in this new asset class landscape will require different skills and disciplines as the ends of the spectrum require different strategies and management.
Carlo Ratti Associati, Office 3.0, Agnelli Foundation, Turin
Future proof portfolios
Cynics may dismiss many of the working and business trends we are seeing today as passing fads or phases, similar to patterns displayed in the nineties during the dot com boom, and bust. However, many of the trends identified in that decade have come to pass – albeit after the usual cycle of overconfidence and creative destruction.
Market corrections are inevitable in the short to medium term; excessive supply in co-working, incubator and accelerator-style space will put pressure on prices and, perhaps, the business models of these providers.
The fundamental drivers of change and increased pace of change are here to stay. Buildings and cities are becoming smarter; people and businesses are more sophisticated in their use of space; and the traditional realms of real estate are being challenged by an increasingly complex, and technology-led market.
SAP smart workspace, France
Applying an active, analytical and digitally aware approach to real estate investment in this new era will ultimately help investors and occupiers at the building, neighbourhood and the city level. This requires a shift in mindset and evolution in skillsets among real estate investors, owners and developers:
Buildings and cities are becoming smarter; people and businesses are more sophisticated in their use of space; and the traditional realms of real estate are being challenged
Three things to do tomorrow
1. Change mindset and strategy
Recognise that you are only as smart as your buildings. Adapt your acquisition, design and build strategies to ensure assets are ‘tech-ready’. This will have a material impact on operational costs and occupational efficiency.
2. Invest in expertise
Put your assets to work. The emphasis on collaboration, both within and between organisations, is driving demand for greater flexibility in spaces and leases. Invest in new skillsets and data analytics capabilities to drive efficiency and productivity.
3. Think beyond
Look at new markets and investment models, accept and mitigate increased risks and harness opportunities in new forms of buildings, submarkets and cities.