Investors must future-proof for the gig economy

By 2030, almost a third of corporate real estate portfolios will comprise flexible space, says a new report from JLL.

February 28, 2018

With rapid advancements in technology, today’s workforce is more mobile and the business cycle shorter. These tech-enabled, dispersed employees are demanding greater choice as to when and where they work, changing the dynamics of the office sector.

Already in London, flexible space operators occupy over three percent of office stock and around 20 percent of take-up in 2017. In other European cities, like Amsterdam, Hamburg and Barcelona, such operators represented around five to 10 percent of lease activity, demonstrating increasing demand for a more flexible model. In Asia, WeWork is expanding its presence right across China.

Last year, the real estate sector also saw a number of high-profile investments into the flexible working space by private equity and real estate funds including Blackstone, Carlyle Group and Softbank, as more big corporates embraced co-working and flexible work arrangements. Microsoft, for instance, has opted to house 300 employees (70 percent of its global marketing and sales team) at two external co-working sites.

For real estate investors, the evolution is impacting the traditional office investment. “This is a massive shift for an industry which has been accustomed to long-term cash flows supported by long-term financing,” says Olivier Elamine, Chief Executive Officer of alstria office REIT.

With these changes, investors will have to look beyond the short-term paradigm and build future-proof strategies that will improve the productivity and efficiency of the properties in their portfolio and avoid obsolescence, advises JLL in its report Workplace Powered by Human Experience: An investor perspective.

Uncovering value

As flexibility is seen as a ‘must-have’ for today’s workforce, investors must adapt their portfolios to cater to new ways of working to establish future income streams, says Alex Colpaert, Head of EMEA Office Research at JLL.

One option is to offer hybrid lease options within a building; underutilised common areas such as lobbies can serve as on-demand co-working spaces.

“Typically, space that is less than 500 square meters is harder to let via traditional leases so landlords should explore more modular, quick-turnaround space that’s easy to let for one to 24 months,” explains Colpaert.

Dutch REIT NSI, for example, has introduced its HNK (Het Nieuwe Kantoor) office format in 13 office buildings across the Netherlands. In addition to monthly and yearly formats, it offers hourly leases for co-working seats, meeting rooms and event spaces, as well as fully-serviced offices.

These super-dynamic assets are flexible, modular and built-to-suit fluctuating business cycles.

Planning for the future

Increasingly, it’s an organisation’s employee satisfaction, performance and wellbeing that are driving successful recruitment.

Innovative work spaces that focus on health & wellbeing, build a sense of community, and create a unique experience have the biggest impact on attracting and retaining talent, says the JLL report.

For investors this means traditional measures of success, such as tenant turnover, income and cost savings, will no longer tell the full story.

Future-proofed offices with facilities that mix work, life and play should be top of the list for investors, says Peter Hensby, Head of JLL EMEA office capital markets.

“The link between HR and real estate teams is blurring as emphasis is put on employee experience and wellbeing, and landlords must engage with and support their tenants’ efforts to reap the rewards and future-proof their portfolios,” he explains.

The most effective way for investors to measure the impact of a building’s space, is through ‘a best-in-class data infrastructure combined with capturing softer data sets via community manager,” says Colpaert.

This insight will help investors to pre-empt tenant needs and ultimately “provide handlebars to effectively influence the indicators that matter: rental income, occupancy and cap / op expenses,’ he said.

By combining traditional real estate metrics with this human experience data, landlords will be able to pinpoint the adjustments that will have the strongest impact on their income.

In the same way that in only 10 years, sustainability has gone from being a ‘nice-to-have’ to a ‘must-have,’ the focus on human experience is no fad, and investors need to be alive to these changes now, Hensby warns.