The current photo of commercial office buildings could be read as an invitation to rethink the operation of this sector of the real estate market. Within this outlook, which appears broad and marked by uncertainty, office spaces are likely to suffer modifications, in line with the changes linked to “how” companies consume and relate to real estate. It is there where flexibility, as a tool, can become one of the most powerful and guiding factors in the “owner-user” dynamic. In this context, it is convenient to analyze the practices and main changes produced during the last time, especially the implications before and after the emergence of coworking. Likewise, it is interesting to dig into possible new solutions emerging from the companies standpoint towards a greater harmony with the administration of their business and the support of landlords on the generation of less rigid links with their tenants, combining new formulas which facilitates the absorption of their vacant spaces.
Risk management is central to the day-to-day life of any company, especially in terms of how to alleviate the impact of a long-term decision, such as through a relocation. Although companies try to obtain greater flexibility from landlords, the existence of incentives that balance this equation in advance has not been verified, such as financing improvements, granting rights to automatic reduction of spaces or effective free rent periods in the event of possible updates on their lay-outs. Under that scenario, coworking firms come to fill the gap in the traditional “Lessor-Lessee” conversation, trying to capture an unsatisfied and growing demand for a more flexible scheme (e.g. technology, start-ups, projects with a fixed duration, etc.).
Between 2016 and 2017, the main coworking players focused on multinationals. Despite this growing trend, the supply continued in the “Renting the space AS-IS” resting the entire financial weight of the fit-out works on the tenants (which in some Latin American countries, as an example, presents around 50% of the value of a five-year contract). Furthermore, a significant share of the corporate stock had some restraints on renting block buildings to coworking companies, given the contingency of this business — quite different from the linear concept of traditional rents. Over the course of the last three years, the intense pursuit for large companies by coworkers mobilized some landlords (mainly in the U.S.), to diversify their pure real estate business incorporating these services into their portfolio as happened with Studios by Tishman Speyer.
Finally, in early 2020, the coworking industry continued its dizzying rate of growth. In summary, it was already clear that coworking was not a short-lived sudden appearance and that it would become a solid alternative within the short-list of corporate spaces options.
Due to the implications of COVID-19 and regardless of the industry or sector, companies could rethink new practices that anticipate possible changes in space metrics, in the event of internal or external changes. In this line, with rents being one of the “undisputed” top three of current expenses, aligning this item with the business performance would be a tool of great strategic value. This could imply, among other resources, the ability to adjust and/or minimize disruptions, look for new efficiencies or alternative correction mechanisms that, overall, promote greater certainty and predictability.
Within this window of strong transition, landlords could also rethink and analyze new patterns, in light of this new profile coming from the demand. Faced with a specific requirement, depending on the market and the business model, alternatives could include: partnering with a coworking vendor; proactively offering a financing program that facilitates investment on space improvements, assuming clauses that vary based on the effective use of the space; and study the technical feasibility of segmenting floors, among others.
Greater control over expenses, more conservative business plans and better financial management will surely lead to greater stability. In this sense, those “flexible” organizations will be more effective when synchronizing phase changes, as dictated by their planning, business development, or their sector or industry paradigms. Finally, regarding the supply, the chance and convenience of studying and implementing actions which stimulate their available spaces in the face of a more selective demand, with new and changing needs in a market that is probably much more competitive, are considered. The nuances will depend on the configuration of each market (e.g. prices and levels of vacancy), the category of the properties and the understanding of landlords for better positioning when a selection of properties is being performed.
About the Author:
Juan Manuel Farola leads the corporate solutions department, Offices Division in Argentina. He has extensive experience in transactions for corporate clients, both at a local and international level.