Recent headlines about some of the biggest names in commercial real estate defaulting on loans and pausing nine-figure flagship development projects prove that landlords have worse problems than just getting people back into the office. The bigger existential crisis revolves around the new vulnerabilities in the fundamental business model of developing, owning, and operating office buildings.
Office vacancies are higher today than they were in 2019, with an anticipated 1.1 billion square feet of vacant office space hitting the market by the end of the decade. This, coupled with low capital market returns and underperforming US REITs, signal the need for more systemic changes than just weathering the storm of a potential recession this year.
While most commercial real estate companies understand the seriousness of this evolve-or-die moment, few know exactly what must change for office buildings to remain strong investment vehicles and essential parts of our society. Part of the problem is a blind spot about how buildings operate today, from establishing a baseline about how many people are entering lobby doors to how to transform tenant relationships with new lease terms and space offerings.
The good news is that some of these mysteries can be solved with data that buildings already collect through building systems like access control.
A roadmap for reinvention
Rather than following blanket advice about investing in new amenities or programming to boost return to the office numbers, portfolios look inward to pinpoint how people interact with individual buildings today.
Occupancy data, typically gleaned from turnstile taps in the lobby and keycard access throughout the building, is a good starting point, according to Stephen Silverstein, Principal and Managing Director of U.S. Studio and Project Management at Avison Young. He explains, “This data combined with other technologies, such as tracking anonymized cell phone pings, can enhance how we understand people’s changing behavior as it relates to the office, the buildings, and even the surrounding neighborhood.”
While swipes in the lobby can calculate the overall occupancy rate in the building, getting similar data about individual tenant suites, floors, and common areas helps buildings sketch out capital improvement plans and strategies for boosting net operating income. This granularity reveals which types of tenants—from company size and industry to hybrid work policy and total square footage—are using their offices the most, a key indicator of how likely they are to renew their lease. “Landlords can benefit from getting their tenants to adopt the same access control system as the building to secure their own office suite because their tenants’ access control data will then be available on the same platform as the building’s, enabling both parties to gain insight into tenant space use, needs and preferences” said Jake Heinz, Chief Marketing Office at Kastle.
These categorizations vary from city to city and building class, serving as an important reminder that industry benchmarks only go so far when shaping action plans. For example, assuming a class-A office building in midtown Manhattan with a big-four accounting firm as a marquee tenant will have fundamentally different performance and space needs than a tech-laden suburban Boston office with service tenants each occupying 20,000 square feet or less of space. At the individual buildings and within a portfolio, occupancy data, when layered with annual leasing costs and tenant renewal rates, lets landlords identify what types of tenants they’re best at attracting and maintaining for multiple lease cycles. From there, creating spaces that best match the needs of those tenant types becomes the focus.
Similarly, badge swipes into amenity floors and building common areas give context to the new ways that people are experiencing the building beyond their workspace. Silverstein shares a key caveat about occupancy data related to design decisions. “One shortcoming about access control data is that it does not tell buildings about what people are doing in a given space once they swipe in and open the door. It doesn’t explain why they are there, how they are using a space, or whether or not it met their needs at that moment,” he said.
The case for flex space
Beyond identifying which tenant types have the most potential, occupancy data is also helping build the case for new lease terms and flex space. It’s also one of the reasons why so many portfolios are exploring flex space offerings in the first place. According to research from JLL, occupancy rates at WeWork and IWG are already back to 90 percent of their 2019 levels, indicating a faster recovery in comparison to traditional leased office space. According to Kastle’s Heinz, “Real-time tenant occupancy data can inform a landlord when a tenant may be over-utilizing a space, like on peak Tuesdays or Wednesdays, presenting an opportunity to proactively offer the tenant unused space in the building as flex space on those days, solving tenant space use needs on an as-needed basis.”
The target buyer for flex space has also matured, introducing less risk for landlords experimenting with directly operating and leasing flex space rather than going through flex or coworking providers. Kevin Anderson, Vice President at flex space provider Upflex, describes these new flex space target buyers as higher-value companies landlords will want on their rosters. “Four years ago, startups and small service companies made up the majority of flex space clientele. Now, enterprise customers are entering the game, looking for easier ways to provide a great experience for their employees at the office,” he said.
Flex space can provide an easier way to attract tenants and create a new revenue stream, stabilizing revenue now while also kicking off relationships with growing companies that could be long-term tenants as space needs evolve. Again, flex space may not suit every building, but understanding how occupancy for existing coworking spaces compares to tenants on traditional office leases kicks off the conversation about what’s possible.
Digging into occupancy showcases how varied office building performance is and how prepared (or not prepared) portfolios are for this new era of commercial real estate. If a building manager can’t ground capital improvement plans or strategies to attract new tenants with information about how it will improve occupancy, lower costs, or boost margins, support for those changes will be difficult to find. The buildings with these insights are better positioned to pivot and thrive.
