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Relearning Leasing

A Changing Market Demands New Perspectives

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To understand the modern economy, you have to examine how businesses are able to operate within it. How they compete, grow and fail can give a sense of larger trends. Unlike economists and politicians, who employ a set of assumptions to ground their view of the economy, businesses are tied to real forces from their customers, investors and regulators. Since most businesses need a physical location and real estate can often be one of the biggest costs for many companies, the way companies use office space is representative of the modern business climate.

And things very well might be changing. Offices have started to become a more fluid piece of many companies’ P&Ls and a more integrated part of all of our lives. This is, after all, the narrative that WeWork has been selling. The way we work is changing, people are working more like contractors, and businesses want their real estate to grow and contract at the pace that they do. Say what you want about WeWork’s valuation or unit economics, they have done a hell of a job at crafting that tale.

But co-working companies like WeWork represent only a tiny sample size of the overall total of office space. They might make a lot of noise but they are not necessarily a great representation of how businesses are approaching their office real estate needs.

Plus, let’s face it, real estate is emotional and not always rational. At one time or another, we’ve all heard about a company that relocated their headquarters simply because the new CEO wanted to be closer to home. Or perhaps you know of a tenant with a space requirement that included being in a more prestigious building, on a higher floor or having a better view than any of their competitors in the market.

Indeed, the leasing process isn’t easy for a business. Procurement of office space can be costly in terms of time and resources, as well as a potential disruption to operations. Also, leasing decisions can easily become contentious within an organization, due to the many stakeholders and competing interests involved.

For most office tenants, real estate is not their core business activity. Leases are only signed every three or more years, and the lease term often outlasts the tenure of the decision makers. As a result, most rely on third-party specialists, brokers, and consultants for advice and to work through the details of the lease. Even in larger organizations with an internal corporate real estate function, it can be difficult to capture the thoughtful attention of senior management unless driven by the business, such as in expansion or consolidation.

However, the tide is shifting. In recent years real estate has become recognized as a strategic tool for attracting and retaining the best employees, increasing productivity, shaping brand perception, and instilling culture and values. As a result, the C-suite has begun to take notice and place greater emphasis on workplace and the corporate real estate function. They are willing to spend more for the right space, whether that means the amenities that they need to run their business or the flexibility to grow and shrink teams without wasteful unused space.

In order to try and understand how office spaces are adapting to this shift in business strategy and corporate culture, we put our researchers to work investigating how lease terms have changed in the “era of WeWork.” We broke down the effects of factors like demographic changes, macroeconomics, the “agile” transformation and, of course, technology to try and understand what has happened in the office leasing market and what its future might look like. Our team combed through dozens of reports and was able to use some great data from our partners at CompStak to try and answer the question: “How is the office real estate industry adapting to the modern economy?”

Our results were intriguing. We found that lease terms are actually changing. The lengths of the agreements are shortening and even the largest corporations are adopting co-working as part of their corporate occupier strategy. This is driven by numerous forces including an economic uncertainty after such a sustained period of growth and new accounting procedures that change the way leases are categorized. It also follows a growing trend of businesses outsourcing any non-core part of their operations.

There are a lot of larger implications from these findings. Since companies are prioritizing flexibility and full-service spaces, many real estate firms are either become much more involved in the day-to-day management of buildings or are finding ways to partner with others and take on more of an asset management role. This study and its findings were the first of many for our platform. We think that understanding what is happening in the real estate world is critical for understanding the economy as a whole. We want to do our part to find the signal in the noise and help keep the industry informed of important changes. There will still be surprises, of course, but we hope our research can help some of our readers stay ahead of the curve, be it meandering or sharp.

For a deep dive into the changing office leasing market, check out this special report: The Dynamics of Office Leasing in the Age of WeWork

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