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Tomorrow’s workplace today: Part 4 – Landlords, tenants and new relationship dynamics

Tina Paillet is Chair of RICS Europe and a senior executive at one of the world’s largest real estate asset managers. She writes here in a personal capacity. In this series, she considers what new workplace paradigms mean for investors and occupiers, employers and employees. This week, how shifting customer expectations will alter the relationship between landlord and tenant.

Tina Paillet, Chair, RICS Europe
27 August 2020

In the post-COVID-19 environment, there will be a flight to high-quality office space. Tenants will want more lease flexibility, larger creative and playful spaces, and a greater range of services. This bundle of attributes is best categorised as operational excellence. It is the quality that will attract and retain knowledge workers. Now more than ever, the post-COVID-19 office needs to exceed the work-from-home benchmark.

Workspace as a Service (WaaS)

A concierge-style service offering, fantastic customer service, optimal space design and a range of cultural events make life in the office like a stay in a four-star hotel. Does this all sound familiar? It should. This is not only the demanding post-pandemic tenant’s wish-list, it is a page taken from the “best practice manual” of the Workspace as a Service (WaaS) model.

The WaaS office is a place for curating professional networks and enjoying serendipitous encounters with interesting and inspiring people. And yet, the typical WaaS business model of long-lease obligations versus short-term secured income has been severely undermined by the Covid-19 crisis. The sustainability of dense occupancy ratios, favoured by many operators, especially in this time of required physical distancing, has also been brought into question. But, while these temporary setbacks may moderate the speed of adoption, they will not stymie the progress of this fundamental shift in workplace norms.

The typical Workspace as a Service business model has been severely undermined by the Covid-19 crisis. But the setback will not stymie the progress of this fundamental shift in workplace norms.

The new WaaS landscape could take many forms. Some landlords are already developing their own inhouse versions of WaaS, while others have staged partial or total takeovers of existing providers. Others still will partner in management contracts and profit-sharing leases; an asset-light future seems to be the preferred post-COVID-19 strategy for many operators. Finally, consolidation between operators is also a possibility.

I have spoken with the senior leadership of two established WaaS operators in London, who are looking to expand into continental Europe. They foresee:

  • Plentiful opportunities to step in with “continuity solutions” to help landlords in spaces where the competition has failed.
  • An expansion of premium brand offers, including personalised services and controlled workspace atmospheres – especially heating, ventilation and air conditioning systems designed with excess capacity and “fresh air only” set-ups. Hands-on management and cleaning regimes have been the mainstays of both operators’ business ethos and will continue to be their value-add coming out of the COVID-19 crisis.
  • Sharp improvements to cleaning regimes, new guided one-way circulation paths, and installation of touchless technologies for access points and, of course, the ubiquitous expresso machine. Specification of more openable windows in future spaces will also be en vogue.
  • The end of high density, with clients managing spacing within their team suites, and common areas – which will form a smaller portion of new layouts – managed by the operator.

Both operators are also convinced that flexible lease terms will be at the top of tenants’ agendas coming out of the crisis. This will be a direct result of continued home-working forcing corporates to rethink their space requirements in both the short- and medium-term.

Tomorrow's workplace today series

Impact on values

In parallel to changes in tenant expectations, many investor landlords are now querying whether long leases can guarantee incomes in a world increasingly afflicted by pandemics. Among the effects of the lockdown has been the widespread demand among tenants for rent rebates and rent-free periods. Some governments have actually sanctioned non-payment of rents as part of their crisis relief packages. Furthermore, as in any economic downturn, the potential of tenant bankruptcies cannot be ignored. This experience will drive investors, and their mortgage lenders, to value real estate investments differently. Changes to commercial real estate valuation and underwriting methodologies are on the way.

In the future, value will be derived from the landlord’s ability to create ongoing value through the curation and management of tenancy flows within their buildings. This will mark a shift from existing value models based on tenant credit and lease lengths.

New lease forms have already emerged in which part of the rent is based on experiential satisfaction (which serves as a proxy for measuring productivity and performance). The seeds of a new relationship between landlord and tenant have been sowed. Tenant experience will be tracked using big data, AI and various customer engagement platforms – a significant departure from the pre-pandemic paradigm.

At the start of the crisis, the majority of pundits foresaw a steep dip in economic fortunes, followed by an equally steep climb back to normality. Most have now resiled from that belief. The downturn is likely to be longer and more painful than initially predicted. This fact, in conjunction with the expected reduction of space take by tenants, will likely bring downwards pressure on rents. Investors and landlords adopting proactive portfolio and business strategies can map a viable route to value protection. The forces shaping the office of tomorrow are revealing themselves. It would be remiss to ignore them.