Real estate is feeling the effects of the change in perception of space from that of a static product to a dynamic service. One of the sectors that is embodying this paradigm shift is the office sector. Companies both big and small are realizing the importance of a well designed, amenity-rich offices. In a bid to attract talent, increase productivity and creativity, and reduce turnover (the holy trinity of management success metrics) businesses of all types are following the lead of tech companies and paying a premium for well-run workspaces. Often times this decision is made easier when considering the benefits of letting someone else take on the expensive and burdensome task of building out an office.
This creates an important decision for many real estate owners and managers. Do they increase their facilities offering to include services that companies are looking for or do they partner with a service provider who specializes in this type of high hospitality? Outsourcing the task of creating and managing office space can have a lot of benefits. It can help buildings stand out from their competitors and offer a truly premium service without the operational headaches that usually come with it. On the downside, it gives the access to the end user (and their data) to an outside entity.
One example of a company that has actively pursued partnerships with property companies is Convene. They started as an amenity space provider for office building but have now grown to include everything from amenity space, premium flex office space and even convenience stores. Their co-founder, Ryan Simonetti, uses the partnership model to entice landlords to use his company’s services rather than trying to go it on their own. “Landlords will either emerge as friend or foe,” he said. “I think that the landlords that chose to go at it alone will struggle to succeed for a number of reasons. It takes time and money to get product market fit and pricing model fit for any new venture. With all the money flowing into the space, I don’t think building owners have time to figure it out.”
This partnership can be structured in different ways. The properties can be co-branded with Convene and the landlord both reaping the benefits of name recognition. The deals also almost always include a revenue-sharing component as Ryan explained, “Our typical management structure is the greater of a percentage of revenue, which is anywhere between five and ten percent, or a base management fee. Our lease deals often include a base rent and then a revenue or profit split with the owner.”
He points to the trend of increasing institutional investment as one of the reasons we might see property owners become more similar to asset managers than property managers is the increasing appetite for real estate as part of the modern diversified portfolio. “The institutionalization of real estate as a major asset class is a phenomenon that is only a few decades old,” Simonetti, a former Lehman Brothers analyst, points out. “If you look at the number of large funds that require some real estate allocation it is dramatically different today than it was a twenty years ago. As this grows it makes sense that these asset management firms are looking for someone else to do the day-to-day of property management so they can focus on the work at the portfolio level.”
The office sector is the biggest commercial real estate asset class. It is also the one that creates the most value outside of the space it can provide. As we see it change from a product to a service we are seeing winners and losers emerge. There is a delicate relationship between property owners and full-service management companies like Convene that will likely become even more complicated as time goes on. The answer to the question, “who will service the office of the future,” will come down to who is able to bring the most value to the people that work inside of these offices. They will decide the fate of the office industry without concern for those who own or manage the assets.