Tech is changing the world at a breakneck pace, but not always in a good way. For those invested in the traditional commercial real estate model, tech has you in its sights. But now is not the time to break out your trumpet to prepare for traditional commercial real estate’s funeral with a touching tribute of “Taps.” On the contrary, to avoid an untimely death, now is the time for commercial real estate owners to pivot from a model of commercial real estate as a means for filling space and collecting rent, to building an untraditional office that engages tenants, supports the human side of business, builds a community, and ultimately monetizes their space to offer services to their tenants.
As Anthony Slumbers explained in great detail in a Propmodo Metatrends article, Space as a Service, The Trillion Dollar Hashtag, space-as-a-service is a necessary and potentially hugely valuable part of the new shift in commercial real estate. But adaptation is necessary for evolution.
At a Propmodo Metatrends 2019 event, a roundtable was convened to examine space as a service, its impact on traditional commercial real estate, and its future in the marketplace. To examine this topic, we enlisted the help of James Duong, head of Business Development at Spaceflow, Tyler Herbert, head of real estate at Convene, and Sanjiv Sanghavi, Vice President of Product for Knotel.
We’ve all seen The Office. In the past, commercial real estate revolved around huge companies installing long rows of gray cubicles, executive offices and conference rooms along the walls, and a kitchen in the middle as a place to congregate. This model is no longer the norm, but rather the outlier. As noted by Slumbers, to adjust to this change in commercial real estate, property owners “are starting to look at what services they can provide for their tenants rather than just how much space they can provide. No longer is real estate viewed as a product, [but] now the new paradigm is becoming space-as-a-service.” As tech – and most importantly AI – more frequently takes over the repetitive tasks that required armies of white-collar workers to do in the past, companies can now modify their operations to become leaner by focusing on enabling people’s creativity. This is leading to a modification of companies’ long-term model of a large headquarters in a “first-tier” city to a focus on decentralized, flexible leases in a diverse set of locations. Commercial spaces will need to focus on shorter-term – daily, weekly, monthly – space usage and be configured to help people be as efficient as possible to accomplish their jobs.
What are the Challenges Facing the Traditional Commercial Real Estate Model?
At the beginning of the panel, Duong outlines the idea that tech was initially created to bring people together, but in reality, it made it so that people could achieve jobs more efficiently on their own. Convene’s Tyler Herbert, having come from an asset management role, agreed that there was a disconnection between how spaces were designed and managed. Sanjiv from Knotel didn’t come from a real estate background but has innovated another previously “static” industry, fitness, when he founded ClassPass and sees parallels in how gyms and offices can optimize space.
He notes that people are social creatures that need to be together, but a challenge for property owners is to build an office space that is a convenient place for people to meet that also supports innovation in employees. No longer can the vast horizon of cubicles meet the needs of today’s tech-enabled workers. Offices must allow for collaborative environments where ideas can be shared, but also quiet places for people to act on these ideas.
Sanjiv adds that flexibility is key in space as a service. For example, to meet tenants’ needs, owners must be able to adapt by allowing for flexible leasing schedules and changeable office layouts such as modular offices. This adaptability will help meet shorter-term tenants’ needs while enhancing their employees comfort levels. While this may not meet the old business model of long-term, stable leases, this flexibility will help companies adapt to the dynamic business world that is driven by ever-changing tech and give property owners the ability to quickly change an office layout to meet a new tenant’s needs.
Herbert agrees with these concepts. In the past, companies used to design a space, hire and architect, and throw money into building an office, then hand it off to a property manager to bring in tenants. But, he says, “that’s only halfway there, as operationalization and monetization of a space was something that was completely amiss.” Despite landlords designing beautiful, fancy office spaces, they were not building them to meet to the changes that tech brought upon the commercial real estate industry. Space as a service means that office spaces must be built to foster community and help companies’ talent thrive. Companies must ensure they attract new and talented employees that can focus on driving further innovations, while working in a comfortable environment. Therefore, having an office space that fosters this community and supports efficiency will breed happy employees and allow companies to focus more directly on their operations. These offices will not fit the mold of the traditional office space and must be adaptable.
Another crucial challenge faced by owners and property managers is the ability to keep their properties occupied. Since 2010, industry has experienced a vastly changing dynamic as 73.9% of all new jobs in the US have been created by sub-500 people companies. Additionally, in London, lease lengths have been shrinking for decades (down to an average of seven years in the United Kingdom) with 75% of tenants vacating their offices when the lease is up on commercial office spaces. It is clear that centralized, traditional offices for huge companies are not a sustainable way for properties to remain full, especially with tech automating away repetitive tasks and reducing companies’ need for a large, centralized labor force.
With these changes in commercial real estate looming, adoption will need to come quickly to ensure properties are full and tenants are kept for the long haul. Sanjiv notes that property owners must be aware that companies will likely have office hubs in “second spaces” in smaller cities as opposed to focusing wholly on one large centralized headquarters in traditional metropolises like New York and London. By diversifying office locations, employees can work with their smaller teams in regional hubs, reducing the need for companies to have a large, traditional grid-layered office in large cities. Property owners and landlords must adjust by building smaller office spaces or convening locations in their buildings for smaller companies that will not have a need for the 10,000-square-foot or larger office of the past.
Second, this office environment will require both quiet and collaborative work spaces, areas for resting, and have the ability to engage in modern marketing, such as visual media and podcast rooms. These offices will have to be as adaptable as the companies that will occupy them. Herbert believes that this smaller and flexible office of the future will require owners to allow companies to utilize branding for convening places and events, as opposed to the traditional, static office environment. This will be especially helpful for smaller companies, as they can use this adaptable space to advertise during conventions and meetings and attract and recruit top talent without spending large amounts of capital on an expensive and permanent office space.
Finally, Duong believes that the future of commercial real estate will be enabled by tech, which will truly unlock the benefits of space as a service for owners and landlords. By empowering technology in their office spaces, tenants can suggest changes to landlords to make their workspace better, creating a happier – and more effective – employee, which benefits the tenant company’s bottom line. Also, by outlining the amenities that are offered in the building directly on phones, property managers can monetize this information by entering into deals with location businesses to advertise directly to tenants.
Technology is here, it’s growing exponentially, it is disruptive, and it’s coming for commercial real estate. “Right now,” says Herbert, “is the slowest we’ll ever be. Every second the world moves that much faster.” For this reason, commercial real estate owners must adapt equally as fast, or risk being disrupted right alongside the industry as a whole. By shifting towards using their space as a service, property owners and landlords will be able to increase tenant company satisfaction by engaging their employees, increase occupancy and lease duration, and apply lessons learned to their entire portfolio, making them nimble enough to swim the waters in the oncoming tide of future of commercial real estate changes.