CBRE Enterprises Survey
Secular market trends are pushing companies to select shorter term, flexible office space options. These trends include: workplace mobility, startup growth, small business job creation, the rise of the contingent workforce, accelerated business cycles, new accounting standards, and sharing economy sensibilities. Companies, of all sizes, face a myriad of business scenarios, from needs for touchdown workspaces, to regional expansion offices.
These business requirements force the CRE world to rethink how we deliver real estate. A traditional 10-year real estate lease can’t solve the flexible requirements of today’s companies. According to Corporate Longevity: Turbulence Ahead for Large Organizations, the average lifecycle of a Fortune 500 company was 33 years in 1965. That lifecycle was down to 18 years in 2013, and it’s projected to shrink further – to 14 years – in 2026. In addition, there’s a staggering 90% startup failure rate. Shrinking company lifecycles bring into question the viability of traditional 10-year leases.
The traditional real estate model of 5 and 10 year leases remains a valuable one for established companies developing company headquarters or large regional offices in proven markets. The headquarters is the core and stable part of the evolving company. It’s central to company culture and profit-making activities. For example, cities are vying for the attention of Amazon in selecting their HQ2 campus location. According to the New York times “business leaders in Tucson have gone so far as try to mail Jeff Bezos, a 21-foot cactus”.
New dimensions of tenancy are forcing customers to look at flexible office options as an alternative to traditional real estate models. What are these dimensions? We’ve seen immense startup growth, preference for workplace mobility, more small business jobs, and favorable sentiments around the sharing economy.
Companies choose flexible office space for the duration of hours or days. Clients from industries including pharmaceutical and telecom often have a significant percentage of their workforce that’s mobile. These teams are often in sales or client advisory. They need space for the duration of several hours or days, near their clients. Read how a Top 20 Pharmaceutical company uses a mobility program for their sales teams.
Other companies choose to offer mobility options to their employees to increase productivity and job satisfaction. The primary driver for instituting these programs are employee satisfaction, retention, and productivity improvements. Mobility programs offer touchdown space anywhere through the LiquidSpace network. Additionally mobility offers access to dedicated hub offices, closer to employees’ homes or clients. Mobility programs give management oversight and control into their flex real estate offerings.
Companies choose flexible office space for the duration of the project. Service-oriented companies from management consulting to media require dedicated space for local projects. Teams working on production projects have a need for flexible office for the duration of their and their client’s projects. Projects tend to span weeks or months and can extend at a day’s request from a company’s clients.
Companies choose collaborative private team spaces that embody their culture, and have a level of service and veneer that is appealing to host their client in. Agile project space needs depend on client requirements and projects won. Thus the space requirement often has a short decision time requirement based on project win date, and project start date. Plus a quick decision time to extend the space as the project requirements extend.
All companies go through a time and a need for swing space. The majority case occurs when a company embarks on building out a new office space and needs a transition space for several months, while the buildout completes. Because there are often construction and permitting delays, customers extend their space in 30 day increments, which they can easily adjust on flexible terms with LiquidSpace.
The more unpredictable use for swing space, is to weather unforeseen disasters. The top three natural disasters are hurricanes, floods, and fires. Read how Scale Computing dealt with two office fires by quickly leveraging swing space. In a crisis, a business continuity strategy that includes on-demand flexible space access is a win for employees and the bottom line.
Companies choose satellite offices for the duration of months or years. Companies launch satellite offices to test new markets. These “test” office spaces can last for months or years, depending on the market’s success. Regional offices often grow as they start including more departments. Regional offices shrink when absorbed into headquarters or nearby hub spaces, or when a test market does not succeed.
At the market expansion stage, companies tend to value the nourishment of their own culture and have longer lead times. Sometimes it takes months to choose the right space for the team. A regional office starts with a department or set of departments. Read how this Fortune 500 company put their culture first in selecting altSpace as their regional office solution.
We can’t ignore the growing trend of flexible tenancy. Traditional real estate companies must align to the evolving wants and needs of today’s companies and employees. When we look at vacancy rates, we typically only see one part of the story. To understand how we utilize space, we must examine “effective vacancy”. Effective vacancy = true vacancy + under utilization. That includes how much of a space is always unfilled, plus the times during which the “filled” space goes unfilled.
When we consider company growth against the terms of a traditional lease, issues in that old model come to light. It’s easy to see that during the front end of an office lease, the company may have excess space, and during the tail end, they may not have enough space. From a sustainability standpoint, we can do better. How? The solution is flexibility.
Often, available floor plans are larger or smaller than what a tenant needs. This results in big block leasing and leaves behind white space that is not used between tenants. This white space sits idle waiting for the long term tenants to move out. Previously it was not possible or convenient to lease it out. From an asset management and investment perspective none of the building portfolios have ever been more than 90% full. There is an opportunity to bring utility to this white space through flexible tenancy.
Even spaces that are leased with the traditional model often times are unutilized or underutilized. This is because teams expand and contract at the pace of business, while the square footage of their lease remains fixed. There is an economic potential in enabling occupiers to license space they lease from buildings on flexible terms. In 2016 30% of the LiquidSpace flexible supply came from private business licensing their unused space. This sector has grown to now represent 35% of the LiquidSpace flexible office supply. We predict further growth in 2018.
Increasing building asset utilization not only makes sense from economic and retention perspectives, but from the sustainability perspective too. Buildings, commercial and residential, contribute to 40% (30 quadrillion BTUs) of U.S. energy utilization. The building sector accounts for 39% of the U.S. carbon footprint. This carbon footprint is larger than any other sector, and larger than any other country outside of China. Against a sustainability imperative on a warming planet there is cause for us to do something more.
Taking the original paradigm summarized in the quote “The greenest building is the one already built” LiquidSpace proposes an update “The greenest building is the one already built, and augmented with flexible office solutions for maximum utilization.”
altSpace, the office fit-out solution by LiquidSpace, brings efficiency into the building model by making the fit-out layer of a building work on the same time scale as current occupier business scenarios require. altSpace takes the the fit-out layer, and re-engineers it to function on the flexible terms that today’s business scenarios demand.
The altSpace model relaxes the requirements for the services layer in a building, decreasing the overall TI costs. altSpace by LiquidSpace can be up and running in 60 days and work for clients requiring space for six months or longer. Since we streamline the furniture and design elements, this puts less strain on buildings for tenant improvement costs.
At LiquidSpace we see an increasing number of office requirements coming from enterprises. This need is predicated on the business scenarios driving the dimensions of tenancy of enterprise customers. “By 2030, JLL predicts that 30 percent of corporate real estate portfolios will be dedicated to coworking or flexible space solutions.” LiquidSpace predicts that by 2021 80% of our customers will be enterprise customers. Enterprises choose LiquidSpace for the breadth of options and insights into space availability. Having a complete market view of flexible space allows companies to adjust to the evolving business needs that govern their CRE portfolios.
Coworking emerged from freelancers and entrepreneurs that wanted to build community amongst one another. These operators drove open, cool, design-forward spaces that are attractive to young talent. We now see many corporations adopt these trends when they select their office spaces. Coworking spaces are attractive to enterprises when their customers are startups and freelancers. These corporations want to be where their customers are. Some industry examples are: advisory, accounting, consulting and marketing firms. Coworking spaces are attractive from a talent pool perspective, as they are buzzing with growth-minded entrepreneurs and freelancers. Thus providing a talent pool to coach, mentor, and attract future colleagues.
Building operators are perfectly positioned to accommodate enterprise real estate needs, for whole and multiple floor requirements. One paradigm shift here for buildings to get onboard with, and we are seeing more and more of our buildings adopt to, is flexible monthly and yearly leasing contracts. 15% of the LiquidSpace networks are now building owners (up from 6% in 2016) supporting the notion that buildings are progressively getting onboard with what their customers are asking for – flexible tenancy options.