Knotel: Why we severed ties with CBRE

COMMENT: It is fair to say the recent news about CBRE planning to enter the flexible office market has not been welcomed by everyone, myself included, says Amol Sarva, co-founder and chief executive of Knotel. At the heart of the industry’s reaction is a perceived conflict of interest with CBRE’s existing advisory services which prompted several providers, including us, to sever business ties with the company. That these providers preferred to be represented by brokers who do not compete with them in other areas makes perfect business sense. What may be less easy to understand is why a traditional real estate and services firm would risk upsetting existing customers in order to enter an already-crowded market. On the face of it, the move appears likely to cannibalise CBRE’s existing revenue if its customers leave in droves – a fact it has clearly anticipated and tried to mitigate in creating Hana as a separate division, away from its leasing business. The days of an opaque, heavily legalised process creating revenue for consultants and advisors are numbered In truth, however, CBRE is just one of many traditional businesses in this sector waking up to the truly disruptive nature of the flexible office market. Flexible office space has grown at a rate of 22% over the past seven years compared with only 1% growth in traditional office space, and as this trend continues, leasing models are also likely to shift. Small wonder that industry middlemen perceive a threat to their position of dominance and are looking to get in on the action. And they are right to be concerned. Old methods of leasing vacancies are slow and antiquated and ripe for an overhaul. Technology is bringing commercial real estate out of the dark ages and newer, more transparent methods are already gathering pace. These will prove equally as disruptive as co-working was to traditional landlord’s business models. The days of an opaque, heavily legalised process creating revenue for consultants and advisors are numbered. Meanwhile, landlords themselves are also reacting to the shifting landscape. Earlier this month, Landsec signalled its intention to enter the flexible office market – announcing plans to boost its office development pipeline to 2m sq ft – while British Land also revealed plans to expand its Storey offer to 5% of its overall portfolio over the next five years. In order to capitalise on these changes in the marketplace, forward-thinking landlords are already in discussions with us about potential partnerships to avoid the complexity and expense of doing it themselves. As the flexible and co-working office space market continues to mature, late entrants deciding to go it alone may struggle to understand and keep pace with its nuances. For example, certain co-working operators need to maintain a capital-intensive, high-sales volume model in order to compete effectively. Our offer, in contrast, relies on providing flexible spaces aimed squarely at large corporate occupiers with changing corporate structures and greater emphasis on distributed teams that wish to maintain their brand identities. These rapidly changing market conditions, coupled with the “soft skills” required to make a success of a serviced office space, mean that real estate firms hoping to parlay their property experience into this nascent market may not find it so easy to compete, despite their bold claims. Those established in the market shouldn’t be resting on their laurels either. In the co-working space particularly, there is a real danger of over-extending reach in the rush to grab office space, which could leave providers vulnerable to changing market conditions. This is particularly true when buying long-term leases and offering short-term ones, which is presumably why others in the market have begun offering longer leases for a larger clientele, rather than focusing on freelancers and start-ups. While the flexible office market is undoubtedly an attractive prospect for real estate companies with shrinking margins, it is by no means the easy option. Deep pockets and a good network will only go so far and alienating existing customers in the hope of gaining new ones is always a risky strategy, one that can cause long-term damage to a company’s brand. With stakes this high, those entering the market need to weigh their options carefully. In response to this comment piece, Brandon Forde, executive managing director at CBRE, said: “The launch of Hana does not in any way change CBRE’s fiduciary responsibility to our clients. “We complete hundreds of flexible space leases every year, and will continue to show our occupier clients all market options to find the best solutions for them. “Similarly, when CBRE is hired by owners to lease their buildings we will also continue to evaluate and compare traditional leases, flexible space leases, partnership agreements to find the tenant that is the best fit and creates the most value for the building. Hana doesn’t change that.”