Predictions

Building flexibility into real estate management

Real Estate Predictions 2019

The real estate business is currently experiencing a shift in demand away from the traditional business operating model to more flexible solutions. Technological advancements and digitization, the quest for sustainability, and changes in user lifestyles are all factors that are demanding a greater level of adaptability in real estate strategic management and value creation.

Written by: Jean Pierre Lequeux Francois Guiot (LUX)

Real estate, wellbeing, and talent

Today’s employees are becoming more demanding when it comes to wellbeing, requesting greater flexibility and healthier, more sustainable working environments. The creative use of real estate can help employers meet these demands, thus giving them an edge when it comes to hiring and retaining talent. Co-working spaces is a real estate operating model that has been growing in popularity in recent years.

The idea is to use space to create “a community of people” who share similar needs and interests but not necessarily the same employer. The concept of co-working has arisen from the fundamental changes in today’s employee lifestyle and ways of working. Most notably, co-working spaces have been used to great effect by startups and small-to-medium enterprises (SMEs) and such independent workforces as freelancers, contract workers, and remote workers.

Studies show that co-working is a win-win arrangement for both employer and employee. Working remotely, professionals co-working with other professionals in a space, especially one that is modern and innovative, fosters the productivity and creativity of employees. From a corporate RE management perspective, memberships in co-working spaces allow for flexibility in RE commitment (less office space rented on a fixed term), therefore reducing costs as well as an increase in the efficiency of lettable area, thus lowering the square meter per employee.

However, from a risk management perspective, a co-working business model can be vulnerable to an economic downturn as its main users can be less stable (startups, SMEs, and freelancers). In addition, operators of this business model usually have a weaker covenant than traditional commercial real estate. A high fixed cost and variable income business model requires greater scale for an operator to be profitable and sustainable. As a result, there is a trend toward vertical consolidation among coworking operators, with bigger scale/multiple location operators proving more successful.

Sustainability in real estate

Encouraging sustainability has many positive impacts in creating long-term value for communities, businesses, and stakeholders. It helps companies attract and keep talented employees as well as promotes brand reputation. Moreover, thanks to the new concept of “green-financing”, sustainable practices help companies widen their access to capital. Considering the fact that over onethird of carbon emissions in the world come from buildings, more and more companies are implementing sustainability practices for their real estate. Smart buildings can also effectively collect, control, and analyze data that can help solve inefficiency problems in a building.

Building a smart, green building is actually easier than it sounds considering the technological and innovative solutions now available in the market. An example is the Deloitte Amsterdam office building - The Edge - which was named the greenest and smartest building in the world by the BREEAM authority. The building utilizes such space efficiency practices as a “hot-desk” policy, which provides space depending on individual schedules on a particular day. The Edge hosts the same number of employees with half the desks and space as used in Deloitte’s previous office - and provides a better quality working environment.

Asset/Portfolio optimization

With the recent developments in digital technology, companies can now extract more value from their real estate portfolio management. Value creation in RE comes from two sources: increasing income and reducing costs. Optimizing the trade-off between these two sources requires analysis and expertise. An important consideration in choosing among the different RE portfolio management approaches is whether the investor has the necessary knowledge, skills, time, and incentives to effectively manage all aspects of the portfolio. Before making an investment decision, there also needs to be proper due diligence and post transaction, efficient property and tenant management to optimize value.

Digital technologies can now help make this entire process more efficient and effective. A range of portfolio management tools - from standardized reporting solutions to cloud-based platforms - are accessible from anywhere in the world. Naturally, moving away from manual processes to fully digital will take time, but a flexible approach will help ease the transition.

Conclusion Given these changes in the marketplace, we expect the real estate business model to become even more disrupted. Many companies will need to adjust to this new environment in order to sustain their position. But though these market trends may seem complex, they do create new opportunities and can be rewarding for the market players that are willing to adapt.