Rebecca Kent
Office workers who have spent months working remotely are forcing landlords to respond to a new set of expectations when it comes to flexible space.
The old desk-heavy flexible operations are being replaced with suites and meeting areas. There’s more focus on community spaces. And tenants are having greater input than ever before.
So, what is it exactly that tenants want? And for landlords – some of whom are allocating their best floors to flexible space – what does a commercially viable operation look like?
Rebecca Kent
Rebecca Kent here, host of JLL's Perspectives podcast. I'm delighted to be talking about flexible office space and where it's headed with experts who have got their fingers firmly on the pulse. We're joined by Simon Trude, the founder and managing director of experiential design group Endrim. Hi, Simon.
Simon Trude
Hi, Rebecca. Nice to be here. Thank you.
Rebecca Kent
And Tashi Dorjee, head of flex space, Australia and New Zealand for JLL. Hi Tashi.
Tashi Dorjee
Hey Rebecca, how you doing?
Rebecca Kent
And Tim O'Connor, head of office leasing in Australia for JLL. Hi, Tim.
Tim O'Connor
Hi, Rebecca.
Rebecca Kent
Tim, I'll throw this question to you: What’s are the attitudes towards flexible office space at the moment?
Tim O'Connor
I think what we saw early on as the pandemic took hold was that concept of sitting in communal co-working spaces took a hit. Smaller organisations that were in that communal setup were reverting back home, and then subsequent to that they have been talking about getting back into traditional space so they can control their environment.
On the other side of it, larger organisations with their own on-demand space within a flex setup has increased because the overall appetite revolves very much around flexibility. Their response to the financial crisis has been revolving around reducing their core space – the space they’re committed to on a long-term basis – but also considering how they use flexible space as an insurance policy for their organisation as they need to call on space, ideally within the same building.
I think the flex office sector is going to be a large benefactor of the uncertainty this pandemic has created. It is really going to find its way into the mainstream of how we work within office buildings.
Rebecca Kent
Is there any evidence so far that the appeal of flexible space is advancing or that there is a new imperative, either from the tenant or from the landlord to deliver?
Tim O'Connor
We actually saw that before the pandemic, where organisations stipulated as part of their requirement brief to the market that they wanted the building they move into to provide flexibility. You saw that with Suncorp in their requirement in Brisbane. They had a very hands-on involvement with Mirvac in the way the flex offer was structured within that building. You also saw it with Deloitte's requirement in Sydney. Deloitte perhaps was not as directly involved, but certainly wanted to know that the building they chose had a flex offer within it to enable them to call on spaces as they needed it. A regular question we're getting now with a range of different occupiers big and small is whether a building has got a flexible offer.
I think from the investor and owner’s side, there have been an awful lot more conversations over the past six or nine months around how they offer a flex solution. Part of that has been leasing to a third party. But there are also a lot more conversations around the owners providing it themselves, even in partnership with a third party, but a more building-tailored offer.
Rebecca Kent
Simon, flex space has evolved to be very much about the user experience. Do you see that continuing? And as we see more potentially landlord-run spaces, are we going to see that experiential side of flex space ramp up?
Simon Trude
Yeah, absolutely.
As Tim was saying, we have seen the need for flex space for some time. It has been a need for businesses, and landlords have been looking for opportunities to provide it for tenants. But most of the time, it has really just been bums on seats. It's been desks, meeting rooms, and maybe a beer tap on Friday nights. What we're really seeing now is a move towards building communities and landlords actually thinking about how people inhabit their building and work and socialise with each other. We're actually starting to uncover what makes up that community.
The other major thing we've really learned - and it really is the silver lining out of the whole pandemic - is this shift from rigid nine-to-five work hours and monotonous routines in a corporate environment, to everybody working from home. When people were forced to work from home, they personalised their own space, they worked in their own times, they had to balance health, family and social around their work. People have learned a lot from that experience.
So, moving forward, when we're thinking about flex space and adding value to the building and to the communities in the building, and how we get people to come back into the office, there has been a lot of learnings from COVID-19. That is, thinking about families and lifestyle and social interactions that we can embed into commercial workplaces and precincts to build community and embed massive amounts of value into peoples’ lives.
Tashi Dorjee
Just to add to what Simon was saying. There are two really interesting things that we've even seen: This trend is almost catalysing an evolution – not just from within the flex industry, from the landlords and what they're willing to offer – even from a operators. A lot of them, in principle, especially the more hospitality-driven ones, are almost in a space where they see, in order to take advantage, or to grow with the demand for more bespoke-orientated flex space, they need to really start focusing on their hospitality DNA and how they offer that.
Because the traditional need of cramming a floor or two of flex-designated space with desks to make a commercial case, is kind of gone. It's almost like, what does it look like if you throw a restaurant or a cafe in there, a bit of catering, or an event space, or even if you help us activate the ground floor with a concierge offering, or clubhouse offering? Operators that traditionally may not have taken those services under their belts now need to evolve in order to do it. Because for a landlord, if you can integrate all those services into one, then it really takes a lot of the headache away from them.
Rebecca Kent
Tim, how prepared are landlords to give up two or three floors to flex space? And also, workers feel more empowered now to work from home and work remotely, so what's the role of flex space in getting them back into the office?
Tim O'Connor
Our organisations have the greatest responsibility in terms of getting people back to work. The onus is on them. But yes, the real estate they occupy certainly plays a part. For organisations that have the opportunity to reduce their permanent footprint, they can draw on flexible space as they want and need it along the way.
The longer-term piece is really around the real estate they occupy and creating that buzz and that energy and that experience that Simon talks about, and people actually wanting to come back. And be engaged both within the four walls of the space their organisation occupies, but more importantly, within the ecosystem, that precinct that their building sits in.
Tim O'Connor
I compare it to end-of-trip facilities. End-of-trip used to be a shower and somewhere to get changed in the basement of a building, and that was fine. That's sort of been an arms race over the past five or 10 years around the quality and scale of end-of-trip facilities. The bar is continually being raised. Now we find that it's very health and well-being-focused, and it's a much greater offer than what we started with, and it really revolves around experience.
Tim O'Connor
And so that is part of that whole, enticing people back to work. But we're seeing the same thing happen in flex space. To Tashi's point, having a couple of floors where you just put some desks in there and right that ticks the box of our flex offer. That's comparable to saying, well, we've got some showers and some space in the basement, where you can get changed. That's kind of no longer good enough
Tim O'Connor
The scale of it is really to be determined by what customers ask for, but I think we're probably seeing it in the order of 10 percent of any building in terms of the flex offer. That's still very much driven by the feedback from either those existing customers or the customers coming in about exactly what they want and what they need.
It's not one-size-fits all. And that creates some real challenges, but in other ways it's exciting because you can have real engagement with your larger tenants. That's probably where that white label offer – that very bespoke building offer maybe run by an external party comes in, where the owner has much more control.
The scary part is you're taking potentially an income stream out. So rather than leasing to a third-party operator that goes and runs their operation, an owner is doing it on a more management model. That does have some valuation impact and our valuation team globally are really looking into that because it has been a point of resistance from the investor community. We don't have a three or five-year set of data where you can see how the model has worked in that regard, and how it might have actually contributed to the value of the building.
Tashi Dorjee
Just to touch on something that you and Tim were addressing in terms of how much flex space there should be in a building, everything Tim said is absolutely right. But you can think about giving up anywhere from 1000 to 5000 square meters of space within your asset. From an operational or a commercial perspective, rule of thumb is around 2000 square metres to run an operation that is going to get you a commercial return, but enough space to put in some of those amenity-driven zones, so it's not just a desk-dense operation. Even if you were to lease a floor out to a flex operator, they probably wouldn't take anything much less than that because that's the point where their costs are fixed and they get to reap some of the return as they scale the business and sell more desks, meeting spaces or experiences.
So that's probably the space that you want to start. If you get any smaller than that, it's totally fine, but as an owner, you just have to decide, 'what does the opportunity cost here?' Am I okay to take a bit of a commercial hit?’ You’d still make profit, but a bit less, and you’d be dedicating that space more to an amphitheatre or something.
Rebecca Kent
Thanks, Tashi. Simon, if there's no one-size-fits-all flex space, where do you even start with designing a community-driven experience?
Simon Trude
Coming up with the right flex solution for an asset really comes down to the process and the engagement, so really understanding the tenants, the needs and the competitive landscape. Also understanding the appetite for the owner in terms of how much risk they want to take, or what value they perceive should be embedded into the building. So, are they willing to give up their best floors to give back to tenants to embed massive amounts of value to the asset? Or do they want to keep those floors for traditional lease and get the highest rents?
Also, the local communities, which we can't forget as well. It's all about how these communities within the building connect with the communities adjacent and within the area of precinct.
So, every project is different. We are working on a project at the moment, which is an incredibly premium new build in Asia, where the top two floors, which would probably be some of the most expensive brands in Asia Pacific, are being dedicated to flex. There is a commercial return on those floors, but the value of what that flex space is going to bring to incoming tenants, and to the ability to hold onto those tenants, is the real driver. So, it’s a very sophisticated landlord that is giving up the best two floors. And looking at the best spaces to give back is not uncommon at the moment.
But we have had plenty of other projects in the past, and we're currently working on, where you take underperforming space that isn't necessarily going to add immense value to the building, and rethinking it in a particular way to embed more value.
Rebecca Kent
Who do you mean by communities?
Simon Trude
A very broad term, communities. Obviously, there are the business communities, as in people working in the building. But then people obviously form their own sub-communities, so running groups, cooking classes, networking events, mentoring programs, all of those different things for people to come together, and across their businesses. Then there’s also the local community to connect with. That’s your local produce merchants, local cafes and charities.
We always talk about hardware and software in the space. The hardware are the spaces and the programs we put within the assets. But the software is what we design to happen within those spaces. It's not enough to be able to just design a good space and walk away. Communities flourish and evolve and change over time. You do need to manage and nurture and understand and measure.
Tashi Dorjee
On top of the experience-driven parts of the operation of flex space, which is extremely important, ultimately, you're setting up a business, right? Especially if you're doing it in partnership with the flex operator, and especially if the landlord takes the opportunity to own it themselves. So, if you're going to be setting up a flex business, it's always best to involve a third party partner, whomever you work with, sooner than later. Engage them even at the beginning of your thought bubble about what you want flex to look like for your asset. There have been a few scenarios, which you could brand as mistakes, where the landlord has taken a stab at the flex design or floor plan themselves. When it came down to crunching the numbers or looking at the forecast or feasibility of the operation, they weren’t making enough money for their aspiration for it. You lose everything else if it's not hitting the commercial target.
In principle, the way to get around that is when you work with your partner, just identify what you're looking to get out of the space. Even if it's as basic as, ‘I really want something to differentiate our asset and to be great for our tenants, but we also want to hit a market rent equivalent of X-dollars per square metre’. If an operator is having a very transparent conversation with the landlord like that with a view to taking on that business and running it as a partner, then they get to design something where they can carve out a floorplan so it's got enough desks to generate a commercial return.
And when I say desks, the industry is seeing much more private office suites rather than dedicated or flexible desks - so less co-working and more flexible office suites with services and meeting spaces. Even if you're thinking around 2000 square meters, you'd be like,’ okay, we'll set aside 60 percent of that NLA (net lettable area) for the commercial stuff, so we hit that target that you want, but then we'll engage in the creation, the process, to understand what your tenants really want out of this space too - or what you want. And with that remaining space, we'll make sure that the amenity-driven zone is exactly what could be deemed as valuable to the people that you really want to appease and keep happy on top of running that business.
Rebecca Kent
Tashi, Tim and Simon, thanks ever so much. That's been a really fascinating conversation. The future looks really interesting and exciting in flex space. It'll keep you all pretty busy, no doubt.
All
Thanks Rebecca.
