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How Commercial Real Estate Landlords are Changing



Drivers of Change  –

1. Flexible Lease Terms

Landlords are being more flexible because COVID has accelerated the long-term trend towards shorter lease terms. In addition, Landlords need to address tenant concerns about building safety with capabilities and processes that include digital services for facilities monitoring, reporting, managing, etc. As well, because of the negative impact of the pandemic on many organizations, there is a need to ensure lease obligations are not onerous on the tenant.

Further, with the economic instability, Landlords are asking questions around business strategy and occupancy options – Do we want to own and control the property ? Do we want to sublet or re-purpose some of the space or whole building ? Do we add a managed space layer with build, buy or partner options? With these examples of change in Commercial Real Estate, Landlords who are flexible have advantage and are better positioned to attract / retain tenants.

2. Changing Occupier Behavior and Expectations

With many people having lost their jobs, it is expected there will be a wave of individual occupiers, freelancers, and entrepreneurial ventures entering the marketplace. At the same time, while many people are looking forward to being back in the office, the coworking arrangements require new policies to mitigate getting sick and to minimize disruptions – which people are use to from working at home. For those returning to the office, there is the need for sanitizers and to reduce contact with others as well as new policies with specific slots for gatherings, social distancing during meetings in communal areas (not at a desk), sending a message to meet (instead of walking up to a desk), etc.

As well, since people are attracted to space physical attributes, the need for aesthetics is continuing with – quality lighting plus attractive common areas, plants, high ceilings, modern design, and robust technology capabilities.

3. New Tenant Office Space Requirements

While many occupiers needs historically have been basic and proximity based, tenants are now observing what Landlords are doing to improve (or challenge) their business as well as assessing how regulators, competitors and changing Customer expectations will impact their organization. In addition, because of COVID, tenants are looking at Landlords for direction and assistance in evaluating how to get things going again and providing additional capabilities to assure their people the office is safe and procedures are in place to keep it that way.

In conjunction with this, tenants are thinking about optimizing their footprint and expenses as well as how hotelling and de-densification will play out in their organization. While removing desks is not something occupiers want to do, they are interested in how to keep their employees secure and productive. What tenants want to avoid is being in the middle of an issue with what their people need and what the Landlord provides. And given the importance of attracting and retaining top talent, Landlords need to be proactive in providing the requested services – or run the real risk of the tenant moving out.

4. Need for New / Value Added Services

To provide services that matter, it’s very important to understand how people utilize space. To gain this knowledge, Landlords and Tenants need insights and information on what people are doing, how they’re working, etc. – rather than basic system login / logout information.

It may well start with tracking the movement and access patterns of people. But the application and interpretation of data will go well beyond what we are thinking today – linking locations, demographics, and behaviors in new ways. With this being very valuable information, Landlords and Tenants need to be much collaborative in creating and managing new services as well as sharing the data and insights so all stakeholders benefit.

5. Financial Pressures

Because of the pandemic it’s a different world now ! Business models and the corporate landscape is changing with the need for the business to deliver greater value as well as be responsive in addressing new needs and rising User expectations, etc. Today, it’s also about cash reserves, being lean and entrepreneurial, providing superior value and convenience, and innovating for impact. With this and the uncertainties how and when things will shake out, Landlords are under huge pressure to change their thinking and modus operandi to reflect the new reality. Or endure the pain of their space becoming less relevant and commoditized.

How Landlords are Benefitting from Change in CRE  –

A. Capitalize on the Opportunity

As a Landlord / Property Manager – ensure you can provide meaningful and flexible solutions – by building / buying / partnering.

Nothing like uncertainty and realizing change is happening to fast track moving to a new reality ! Because of the pandemic, the growing presence of digital, and new attitudes – this is an opportunity to effect change and achieve major advantage – since people are open to options and new experiences that deliver high value and reduce risk – to better position themselves and their organization for success going forward.

With this, people are exploring new opportunities, becoming part of new ecosystems, determining ways be integral in the value chain, etc. For example, do something better than anyone else to have a slot in the value chain or to be a player in the ecosystem. Given the personal and business changes as well as the dynamics caused by COVID, now is a good time to take a fresh look at what you do and how you’re doing things, ensuring you have a compelling business value proposition, deliver important benefits, are a great partner in the value chain, can monetize value creation, how you want to be positioned in 3 / 5 / 10 years, etc.

B. Offer a Range of Security Capabilities

Futureproof the asset – be ready for opportunity / new requirements.

Security is an important area and opportunity for innovation. Because companies and people are thinking about security in different ways now, it’s crucial to consider a range of security capabilities – physical, cyber, and health. For Landlords and Tenants, the best and fastest way to have a secure environment and be pro-active to mitigate personnel health and business risk, is to engage with companies who specialize in security products and/or provide security capabilities with their CRE solutions.

With this, Landlords need to address additional occupier needs – with the different requirements of enterprise, start-up, and freelancer tenants.

C. Leverage Technology

Effectively bridge the technology knowledge and operating model gap.

Since it’s essential to provide technology and digital capabilities to address evolving tenant and property management needs, benchmark against various industries – especially in organizations who have made significant progress in adopting technology. For example, residential real estate uses 360-degree cameras and other services to show space and have products to visualize various configuration or usage options for the facility. With this generally not available in Commercial Real Estate, learn from others in the industry as well as other markets (ie: financial services, technology companies, start-ups, etc.). Further, recognize with the adoption of technology in Commercial Real Estate being significantly less than in many other industries, there are major benefits to having a Technology Partner to fast track extending services in digital, using technology more to improve outcomes and decision making, etc.

In addition, think about the User / Tenant / Consumer experiences in the delivery of services. For example, occupiers expect their business facilities to be similar or better than their home or mobile environments – where ordering items from the phone is the new norm. And as the years pass, with the increasing presence of technology in our lives, ensure communication, information access, and digital services are convenient and easy to use, complement how people live, make them more productivity, enhance their lifestyle, etc.

D. Be Agile

Landlords need Partners to accelerate delivering more value and providing new digital services to increase revenue, reduce costs, and evolve their business model.

For Landlords interested in improving their own and tenant operating efficiencies, this is a great time to leverage technology with a suite of digital services to reduce costs, expand revenue streams, add value, increase property appeal, etc. to improve outcomes.

Another example of being agile is for Landlords to repurpose unused or excess space for ‘hotelling’, other uses, providing a turnkey office environment, etc. With this and recognizing Landlords like stable revenue streams and high occupancy of their properties, this is an opportunity to use excess capacity to attract businesses that are part of a major tenant ecosystem. With this and other tenant requests, there is a need for Landlords to provide different space configurations, additional services, etc. Since this convenience and flexibility is very appealing to tenants to facilitate conducting business as well the ability to expand the organization in the building in the future, Landlords who can provide space this way have advantage and realize additional returns.

E. Better Manage Risk

Recognize the changing nature of Risk.

With the traditional Commercial Real Estate business model being about property location with a structure of Glass, Concrete and Steel – the CRE model now needs to be extended with Digital Capabilities. This more complete perspective of Commercial Real Estate deliverables is analogous to people already expecting a radio, climate control, safety features, etc. in a car, or a computer including software, communications capabilities, etc. This makes for a better User experience with quick gratification, more value, etc. Similarly, the need for CRE Landlords now is to mitigate underutilized or unused space by better managing the gaps between tenants, tenant improvements and incentives for filling space. With this, it’s now very important for Landlords to shorten the time between voids, find ways to make the space more flexible, get space online quicker or provide fully furnished space with desks, various services, etc. To increase property appeal and returns as well as reduce risk, Landlords need to be closer to tenants to understand their business and how they configure and use their space to be better positioned to address their evolving requirements.

Summary

As in all industries, Landlords who are proactive at adapting to address the new needs in the new reality, will have a future. Those who don’t adapt will find business increasingly challenging and less rewarding.

With COVID, increasing business demands, rising User expectations, etc. changing Commercial Real Estate, success for Landlords and Property Managers going forward is dependent on –

  1. Further developing their look ahead skills
  2. Have greater insights on the needs of all stakeholders
  3. Evolving their business model
  4. Adding meaningful new digital services

To much better position their organization to improve outcomes by–

  1. Increasing revenues, the bottom line, and return to stakeholders
  2. Reducing costs
  3. Attracting and retaining top talent as well as the better quality tenants

These are significant advantages – and the future of Commercial Real Estate.

 

Oct 21, 2020  By CAIL / Meyer Prinsloo       CAIL Smart Buildings commentary       info@cail.com

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