CAPITAL WATCH ISSUE 1 2018

A key trend within the office market in recent years has been the reduction in the length of lease commitments. This trend has been driven by the phenomenal rise of short- term serviced office formats (constituting 30% of central London take-up last year). These new formats tend to outperform in terms of user experience, with operators such as WeWork adding the cool factor to what has previously been fairly functional space. They are increasingly attracting a mix of smaller businesses and mature corporates to spaces formerly reserved for the latter. The combination of these factors poses a challenge for office investors, who have typically built their business models on letting space on long leases to strong covenants. The result of shorter contractual commitments expresses itself in greater churn, more potential voids, and weaker covenants over the term of an investment. In other words the risk of holding real estate could be rising. The major risk comes at the end of a short lease commitment. Will the tenant stay or go? By looking more closely at that decision point, we can better appreciate the level of risk and look at ways in which new technologies can help to mitigate it. Traditional switching costs for occupiers include the cost of acquiring new space, fitting out the new space, penalties (for instance in operating a break clause), and potential staff disruption. Serviced offices have broken down some of these barriers: a small business moving from one coworking space to another might not seek advice or need to pay fees, as the fit-out costs are typically borne by the landlord. Investors therefore need to find new non-contractual barriers to exit in order to keep tenants “sticky” to assets and thereby reduce their risk. The key to this is to make the office experience personally compelling, and to power up the bespoke benefits associated with the office such that giving them up would be a real wrench. At the heart of this new proposition lies the idea of community. A fundamental mindset change is needed for the typical office investor to view itself not just as a provider of space or a property manager, but also as a service provider, a hotelier and a custodian of spatially defined communities. If an operator is successful in nurturing human bonds, these can in many cases be more powerful than contractual ones. The one stop shop solution to this might be to hire a dedicated community manager – a role that was historically only seen in coworking spaces – to manage social activities and to help link occupiers with each other. Businesses such as Equiem provide an end-to-end customer service by combining a community manager with an online portal to drive connections within the building. However, a major area of development in PropTech has been on providing platforms which allow landlords to engage their customers by linking all of the building services to one easily accessible platform without the requirement to have a community manager. In this area, we have companies such as Space-Flow and District Tech who provide platform solutions that allow occupiers to chat with each other, connect with local retailers, and view events occurring in the building - allowing for the emergence of an organic community that is self-sustaining rather than requiring constant administration. Much like in the retail sector, office occupiers also want personalised experiences. This means observing and measuring user experience, typically through the installation or retrofitting of sensors and beacons, which has traditionally been very expensive. Smart sensor company Disruptive Technologies provides a cost-effective and scalable IoT solution to collect data and gain insights on how occupiers use the space around them. This approach becomes even more powerful when paired with tools such as Locale, which provides landlords with incredibly granular information on their occupiers, allowing them to personalise the user experience through a platform in real time. Often seen in the context of reducing friction in transactions and creating process efficiencies, PropTech is typically viewed through the lens of cost reduction. This new wave of technologies offers the potential for value preservation in a world where the ties that bind occupiersare more about community than covenants and long-term commitments. THE HOT ISSUE Risk, communities and PropTech By Rory Young, Futures & Proptech Consultant rory.young @cushwake.com Leveraging technology to drive security of income CUSHMAN & WAKEFIELD 08 THE HOT ISSUE