Cathy goes to CoreNet

Report from CoreNet’s Predictions and Resolutions event held on 16 January 2018

January is a traditional time to make predictions and resolutions for the year ahead and so it was that CoreNet’s UK chapter yesterday brought together an occupier, agent and developer, moderated by an investor, to discuss what 2018 might bring for the corporate real estate world.

 

The corporate real estate world is in the early stages of its biggest structural change for decades, said Stuart Beety, Head of Corporate Real Estate EMEA, at Credit Suisse, arguing from an occupier’s perspective. Three super-trends will transform the industry: the on-balance sheet reporting of leases through IFRS16 will lead to substantial changes in the very nature of a lease; the growth of millennials in the workplace – predicted to reach 50% in the next few years – will result in the increasing standardisation of the office environment; and the fourth industrial revolution will see AI, IOT and intelligent sensors become ubiquitous in the property world and something that occupiers will decide whether or not they want to subscribe to within their property portfolio.

 

Toby Ogden, International Partner, Head of Transformation EMEA, at Cushman & Wakefield, representing the agent’s perspective, was even more contentious. “The suppliers to the real estate sector – landlords, developers and investors – will finally realise that they don’t understand their customer. They don’t understand what occupiers need for their space. The standard shell and core is not what occupiers want and therefore new incumbents, such as WeWork, are challenging the traditional model.” Landlords, developers and investors will wake up and develop new models which are different and more flexible. People are the drivers of demand, not companies, he argued.

 

In response Steven Skinner, Transactional Director at developer HB Reavis, acknowledged that unless developers and occupiers work together now, they’re going to miss the boat for future opportunities in 2020/2021. But he argued that there isn’t “a stand-off” between developers wanting a 20-year lease and occupiers wanting a three-year lease. “It’s a conversation. We can price it. But we need an active dialogue.”

 

The flexible revolution

The packed audience for the event, held at M&G Real Estate, was also provocative in its predictions. An electronic poll revealed that 77% believe flexible working space will become part of a balanced solution for corporates over the next five years, with 30% of space leased this way. Almost 20% felt that it will be the main way that space is occupied, making up 60% of the market. Currently London is the largest market for serviced office space[1], and serviced offices makes up 10% of take-up[2].

 

But HB Reavis’s Skinner argued that while occupiers of smaller floor plates are tempted into the serviced office market, competition for larger floorplates remains high. Big occupiers want their own leased space, he argued.

 

Cushman’s Ogden was more pessimistic, describing the moved to serviced offices as a “wholesale shift” predicting that 20% of the market would be delivered in this way in future. But he argued that the market will move from offering one-to- two serviced office models, to a four-to-five product market. “Occupiers will increasingly match the way they procure space to their strategic priorities.”

 

Developer Skinner admitted that the Cat A model wasn’t working for many but argued that a move to short leases is not necessarily the answer. “An occupier’s investment in a fit-out negates the flexibility of that lease as they’re not going to want to walk away from that investment.” Stuart Beety at Credit Suisse argued that most significant developers will be offering serviced office models by the end of 2018, with many already doing so. And Skinner retorted that they would do so cheaper than many serviced offices, as there won’t be a middleman.

 

Developers were not the only party under fire. An audience poll about the impact of AI on agents revealed that 54% feel that agents’ jobs will be affected and they will need to focus more on advice, while 30% felt this was already happening. Cushman’s Ogden was bullish about the prospect of AI on agents. “We’re already developing propositions to deal with this. It means we really need to understand our customer and what they value. We’re a relationship business helping our clients to navigate change and processes and provide on-demand advice.”

 

Lease accounting

The final surprise for the morning was the perceived impact of the new lease accounting rules, which will see commercial leases come onto the balance sheet for many companies, under IFRS16. Almost 50% of the audience felt that the change will have a fundamental impact on the corporate real estate world resulting in rent level becoming a function of the lease length (short lease = premium, long lease = discounted rent). Meanwhile 45% felt it would result in the occupier wanting shorter leases.

 

Resolutions

The panel, moderated by Matthew Stone, Head of Long Income at M&G Real Estate, ended the session by offering their resolutions for the year. The occupier wanted to approach his role from the perspective of a millennial; the agent vowed to stay relevant and avoid doing what he did yesterday as it no longer exists; and the developer resolved to understand his customers better and develop a product or leasing structure which supports what occupiers need.  Not bad for a to-do list for 2018.

 

[1] The Flexible Revolution: Insights into European flexible office markets, CBRE research 2017

[2] Savills research: Serviced Offices in Europe

 

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