Mainly for Students: Office space in a hybrid age

In the first article, I introduced the importance of CRE for people, organisations and even countries, and the strategic 10P approach designed to drive alignment of people, process and place. One of the Ps – procurement – includes the way in which corporate assets are held. A quarter of a century ago, this was mainly a choice between outright freehold ownership and long leases, often 10, 15 or 25 years in length. The Donaldsons-Lasfer study in 2007, suggesting an optimum of 65% leasehold and 35% freehold occupation, seems light years from a post-pandemic, hybrid and pay-as-you-go environment. How things have changed. Modern leases Today, to match the agility and flexibility of businesses, leases are typically three to five years across the globe, with only larger, blue-chip tenants, headquarters or those tenants with significant fit-out typically taking leases longer than 10 years. For years, sale-and-leasebacks, converting freehold to leasehold, releasing capital from the balance sheet and improving ratios such as liquidity, have driven the expansion of supermarkets and other businesses, and these transactions required longer leases. International Financial Reporting Standard 16, introduced in 2019, brought recapitalised lease payments on to the balance sheet for leases over 12 months in duration. This has had a significant impact on the market and really helped fuel the move to flexibility and the meteoric rise of co-working, as well as potentially reducing some of the benefits of sale-and-leaseback transactions. As Deloitte commented in 2019, leases or licences under 12 months are permitted for exclusion under IFRS 16, indicating there will not be a requirement to capitalise related rental liabilities on an occupier’s balance sheet. In view of continued macroeconomic headwinds, it may be that the larger corporate occupiers need to increasingly view flexible office space as a more mainstream solution to accommodate staff. In a post-pandemic world of agile occupation, with global occupancy rates struggling to climb above 50%, the focus is firmly on pay-as-you-go and cost-effective, flexible options to meet the volatility of hybrid-based workspace demand. This is where technology, and proptech in particular, is creating a highly nimble, flexible and “asset light” approach to procurement. Companies such as hotdesk (www.hotdesk.com) in the UAE and, more globally, Desana (www.desana.io) disrupt the procurement approach by providing flexible, on-demand solutions which fold existing assets and third-party spaces into an integrated eco-system for corporate clients, controlled by an app on your phone and with integrated invoicing and cost control. Moreover, a massive amount of data can be captured by the proptech behind this approach. Case study: hybrid workspace provider Countless articles have been written on the disruption of workplace culture that’s driven record growth in the flexible office market. It’s a transformation that’s been on the cards for some time, beginning when businesses started building their operations in the cloud. Occupiers unshackled themselves from the need to be in the same building as the infrastructure the business exists on, and in turn radically changed the possibilities for gaining competitive advantage in hiring and retaining talent. The pandemic acted as a catalyst by fostering the necessary cultural and institutional change in a matter of months, rather than years, and changing the way we use and understand workspace. Business and workplace leaders were driven to adapt much quicker than expected, in turn supporting the growth of companies such as Hotdesk and Desana. Change can be uncomfortable, but what’s clear is that this disruption is delivering better outcomes for both people and business, with additional benefits, such as reduced commuting and carbon emissions, providing an important additional layer of sustainability. Integrating on-demand and flex solutions with workplace strategy enables businesses to deliver hybrid and remote workplace strategies for their teams, and at scale. Exploring Desana as a case study example, it provides two distinct services that combine to provide a single solution: A network of thousands of hot desks, meeting rooms, private offices, and event spaces, which are available to book on-demand at hundreds of workspace providers in more than 66 countries. An HQ service, allowing customers to add their own offices to the platform, unifying workspace booking globally, for hybrid and remote teams. It also provides accurate data and insight on employee usage and behaviour. A detailed analytics dashboard provides immediate sight on everything from how many days people are booking flexible workspace, through to how teams are collaborating, and analysis on the efficiency and effectiveness of a company’s head office. In this time of change, data is essential to support both short and long-term real estate decisions, like site consolidation or office reconfiguration. Data helps organisations achieve the important alignment of processes, people and places mentioned in the first article. In conversation with Desana chief executive and co-founder, Michael Cockburn How does the flex office approach change the management and procurement of space? Moving from managing a small number of large buildings to a large and distributed number of places to work brings a totally new set of challenges for procurement teams and real estate leaders. Procuring a larger number of solutions from multiple vendors is inherently difficult – more people management, quality control, invoices, contracts, and compliance. A system like Desana solves this by providing a single legal agreement with the customer, who can then immediately provide employees with autonomy over how and where they need to work, while accurately tracking behaviour to make longer term procurement decisions and drive efficient use of space. How does this flexibility reduce risk? Moving away from expensive, rigid, real estate portfolios to a combination of asset types enables real estate to be adjusted and iterated to reflect the needs of the business. One of these asset types might still be a traditional lease, but on tenant-friendly terms of two to 10 years, while employees are also offered flexible workspace access and the use of on-demand workspace platforms like Desana. Moving towards this more agile approach spreads risk by reducing long-term commitments without removing access to workspace altogether, and allowing workspace to adjust in response to changing employee numbers and requirements. Again, that important alignment of people, place and process is facilitated. How does this flexibility reduce cost? Moving from a fixed cost, based on assumptions of workspace need, to variable costs based on actual use, can typically deliver a 60%-90% cost reduction for customers, savings just not possible with traditional lease agreements. Data shows that, given the autonomy to choose how they want to work, employees do not behave how you would expect. For example, a large global tech business using Desana with 1,500 actively engaged bookers, books into an average of 0.4 spaces per person, per month. Compared to permanently holding a space for every single worker to come into a workspace every day, this represents a massively reduced total cost per employee of providing access to workspace on demand. How do you build an “agile portfolio”? For those pursuing any form of hybrid, remote or distributed working, an agile portfolio that includes a combination of asset types is likely to offer the most adaptable route forward. Alongside traditional leases in core locations, employees are offered the use of on-demand global workspace platforms like Desana, which can also unify office bookings across the entire portfolio, ensuring a consistent experience for users. This approach enables businesses to reduce the risk of committing to new strategies before they’re proven, continue to analyse employee behaviour and demand, and regularly iterate their portfolio in response. The result is a CRE portfolio that can flex and adapt in response to changing business needs and economic circumstances. How important is agility and a bespoke CRE procurement strategy? In a rapidly changing world of workspace design, utilisation and distribution, the smartest thing leaders can do is experiment, measure and iterate accordingly. They need systems that provide the data and tools to successfully do that. Tech and innovation have made it possible for businesses to implement a CRE strategy, measure how it is being used, and fluidly iterate their procurement needs based on behaviour, team satisfaction and alignment to business needs (just like an agile software development methodology). There is no one-size-fits-all, but utilising the solutions out there to develop a bespoke strategy enables decision makers to drive business to the next level and effectively realise the opportunities presented by hybrid working and achieve true, constantly adapting alignment to the business. Nick Nunnington teaches corporate real estate, property management and valuation at Neapolis University, Pafos, Cyprus. Paul Collins is the editor of Mainly For Students and teaches at Nottingham Trent University Next time In the final article in this series we will focus on productivity, how the built environment impacts on human performance and how proptech can help support the measurement and improvement of productivity in the workplace Image © onurdongel/iStock