How does flexible workspace change the way we approach a lease expiry?

Further to an article written here recently, Top 5 Mistakes When Leasing New Property, this month saw an announcement that may mark a milestone in the evolution of commercial real estate in Australia. One of the larger coworking space/serviced office providers, or simply “flexible workspace” providers as there is little now to distinguish between the two, leased an entire building, or at least all of the office space in it. The, as yet to be built, Daramu House in Sydney’s Barangaroo precinct will house 10,000m2 of flexible workspace for the large US based provider WeWork.

As you probably have noticed the flexible workspace market is booming. The quantum of flexible space grew by over 25% in Sydney alone in the last 12 months, not including the Barangaroo deal. Flexible space now accounts for 2.5% of all office space in Sydney, according to a recent Colliers report. Compared to many major cities this is low, suggesting there is a long way to go yet.

There is nothing new about the desire for flexibility. Small businesses, start-ups and those seeking project space have been using serviced offices for decades now. The demand has grown as prosperity is fertile ground for new ventures, and technology has allowed us to work anywhere. The long-term lease becomes increasingly hard to reconcile with our fast-paced business environment so the ability to up size, rapidly, proves to be very attractive. This is only part of the story. Community is what it’s all about for many providers with some offering a mini version of LinkedIn for its members, allowing them to communicate and collaborate online as well as in their coworking spaces. The attraction of flexible space will continue to grow.

So how does the growth of flexible workspace impact on the way we approach the expiry of a company’s lease over commercial space? As discussed here previously a forthcoming lease expiry requires careful planning and, ideally, plenty of time. We begin with a business case for the move. What are the objectives? What growth do we factor in? How do we cater for the demographics of staff and customers? What aspect of our business is fixed and what is flexible? It is this last question that takes on new meaning when we start to consider how our approach to a lease expiry may change given the increased prominence of flexible space in the market.

The process of determining how much space and where is driven by a company’s history, a change in the market for its goods and services, its success or failure in tapping that market, the demographics of the staff, the location of customers, suppliers and amenities. The list goes on. More often than not change in the amount of space a business occupies from one lease to another is incremental as opposed to meteoric. There are obviously exceptions to this rule but they are exceptions. The same could be said of location. A business that has grown in North Sydney, for example, is perhaps likely to remain there. Dramatic change in location could result in the loss of staff or customers. Flexible workspace may change these patterns.

Building owners are now factoring into their plans the provision of flexible space to their tenants. This permits companies to lease space in the knowledge that additional meeting rooms, work areas and other facilities are available to them should the need arise, giving them the comfort that comes with knowing there is room for growth should that be a one-off requirement as a result of a project or an ongoing need for additional external meeting rooms. The theory is therefore that tenants can lease “core” space under a traditional lease agreement i.e. a fixed amount for a fixed period and “flex” space on an as needed basis. This provides flexibility with the quantity of space required but, obviously, not the location as it is specific to these buildings and their tenants.

We can now approach a lease expiry with the ability to cater for flexibility in both size and location. That is by incorporating into our requirements “flex” space via a Service-level Agreement (SLA) with a national or global flexible workspace provider. Of course, companies have been using serviced offices and coworking space for years to cater for their needs in new markets or for project space but that’s not what we are talking about here. Instead to go to market, in a competitive tender situation, for flexible space as part of, and in conjunction with, the search and negotiation for “core” space under the usual RFI process. The market for flexible space is both diverse and competitive and even has its own brokerage firms. We can tailor the tender process to suit the needs of company sales teams or those who are often out of the office, for whatever reason. The requirement can include the type of facilities needed, hot desks or breakout/lounge areas for example, but also the level of security both for belongings and data, the latter via dedicated routers and switches housed in the flexible workspace provider’s server room. The SLA would then align with the lease over fixed space and complement that space. Key to this is the possibility that inclusion of flexible space in a company’s workplace strategy may well lead to a situation where we have greater flexibility in where a company locates fixed space, possibly in lower cost locations closer to the homes of staff members. The outcome, a significant reduction in the cost of occupation and greater flexibility in how we work.

Further colouring the possible use of flexible space in a property requirement is the current state of the commercial property markets. If vacancy rates for office space are low, as they currently are for Sydney and Melbourne CBD’s for example, the use of flexible space in a requirement provides companies with an opportunity to limit the impact of low vacancy rates i.e. move the market in favour of the tenant to some extent. The next decade will prove interesting for an industry short on disruption.

Northburn Partners provides property solutions to users of commercial and industrial property. Our clients are SME’s, not-for-profits, listed Australian companies and multinationals. We are proud of our independence and work exclusively for end users of property. We provide this service across Australia.

Get in touch if you have a lease expiry, property requirement or would like to discuss this article. We look forward to being of assistance.

The Top 8 points to consider when buying or leasing industrial property

Following on from a recent article recommending that you do your homework and prepare a business plan when taking on new commercial property here we look at some of the short-term and long-term considerations when buying or leasing industrial property.

First up, the short-term considerations, and by short term we mean those factors that will have a meaningful impact on your decisions within 3 to 5 years.

Buying or leasing property for your own purposes i.e. property you will occupy? Then we need to be sure we are able to use the premises for our intended purpose.

The answer to the above question will be determined by others, specifically local government and councils, because they determine what type of business is permitted to operate on the land or in the property you are buying. So, first up, we need to know what businesses can operate in the premises. A town planner can assist you with this, although the information is in the public domain sometimes it’s better to have an expert’s interpretation of what you can and can’t do as the stakes are obviously quite high. Once we know our use is permitted we can establish what conditions might apply to that use. Again, our town planner can guide us here, but for a definitive list of conditions related to our use we may need to actually apply to local government for that ruling. In Australia this process is known as a Development Application. It may be a requirement that your leasing or purchase of the property be made conditional on being granted this approval. Depending on the nature of your proposed use other agencies may need to be involved; the Environmental Protection Agency, the Foreign Investment Review Board (in the case of overseas investors), state governments and so on. Time spent in reconnaissance is seldom, wasted the saying goes. This is very true when it comes to property.

What plans and developments are proposed for the area?

In an evolving urban environment infrastructure is constantly changing. This is not just about roads but rail, power, communications and other utilities will impact on the functioning of your property and its attractiveness to prospective buyers and tenants. Information relating to proposed plans is available on a national and local government level. Again, our friendly town-planning consultant is of great assistance here but we need to dig to find out what is being considered, or has even been approved, both in terms of your prospective neighbours and the wider area.

What am I inheriting with this property?

This is perhaps the single most common oversight is no thorough due diligence on the property in advance of signing the deal. What seems to be very obvious sometimes needs to be pointed out. Proper technical due diligence on a prospective property will consider:

• The presence of hazardous materials, and for the most part we are talking asbestos here. This will require the commissioning of a hazardous materials report. In fairness, this is really the responsibility of the current owner to provide as it relates to work, health and safety but many owners will not have one. We need to be aware of what exists on the site as it may have a bearing on whether we rent or buy at all never mind the cost of removing it.
• What compliance issues exist with the property? Are fire services compliant, does the property cater to current codes in terms of disabled access? If not, then we need to know what would be involved in making this right.
• How will proposed legislative changes impact on the viability of your property. Requirements for compliance are constantly evolving. It is important to note where the risks lie. A competent building consultant should be able to alert you to these risks.

How much do I need to invest to make the property usable or lettable?

The answer to this affects the purchase price, of course, but also what you are willing to pay by way of rent. Ideally the property ticks all the boxes as far as compliance and statutory matters are concerned, see above, but what do we need to do to make the property work. Its almost a given that this will be more than you think because, while we tend to consider the obvious; fitout, decoration, maybe lighting, we easily forget the need for security, communications into the building, signage and air-conditioning alterations or upgrades and so on. In other words, if its not obvious it may well not be considered. A capable project manager can assist with pointing this out.

Industrial hot, retail not!

Dramatic changes are taking place around the way we shop, consume and move. The world of commercial property has undergone seismic shifts over the last few years and no greater an example of this is the rise of online shopping. Where investors would once upon a time have gone into retail stores they are now building distribution centres. Bulky goods centres, warehouses and industrial property generally has benefitted from this. This trend shows no sign of abating and prices reflect this. There is a shortage of good light industrial property. Traditional retail on other hand needs to find a new purpose as small shops are going to struggle. The talent lies in repurposing these going forward and perhaps the future of the retail, and malls, lies in providing dining, entertainment or other experiences rather than a place to shop.

Now for some longer-term considerations. By longer term we mean with a 10-year horizon.

Parking to be a thing of the past?

Driverless vehicles will change the way we live our lives in ways that we probably can’t fully comprehend yet. For example, long commutes to work could become much more tolerable as we can work or sleep on the way. What happens to all that parking in the city, or on your land? In fact, if property comes with parking then we instantly have an opportunity to consider repurposing this in the coming years. A building with its own car park now provides development potential, depending on statutory controls, over the longer term. And for that matter those statutory controls will need to be revisited. It is expected that we will see real changes in the way we live in as little as ten years thanks to the arrival of this form of automation. This will inevitably impact on commercial property.

Automation generally

Increasing automation in commerce means we are likely to find that the needs of people in terms of facilities and location will reduce as there will simply be fewer of us working in warehouses, distribution centres and factories. That probably means that location will be less of consideration when it comes to a building as we are less driven by the demographics of our workforce. The provision of goods and services will be increasingly automated. That’s not to say we will be working less of course. A generation ago the arrival of personal computing was going to herald the arrival of a new age of leisure where we expected to be working fewer hours per week. That didn’t turn out as expected!

What else?

As we consider property we need to consider what changes are afoot and how they might impact on uses and therefore values. We know, for example, we are going to see an ever aging workforce. Having three generations in work will become the norm. We know that medicine is letting us live longer although, crucially, more advances are being made in our physical wellbeing than our mental. Dementia, and its treatment, is to become a major influence on society. The list goes on.

The more knowledge we have about the condition of property and the more informed we become on how our working world is changing, the better the decisions we make. Northburn Partners guides users of commercial property through this landscape.