ULI: Landlords may need to ‘act soon to preserve rental income’

Offices may be here to stay but the sector is in “a full state of flux”, according to a report on the future of the office, published during MIPIM by the Urban Land Institute and The Instant Group.

Analysis from a survey of 285 office occupiers, landlords and third-party advisors in North America, Europe, Asia Pacific, Middle East and South America “proves that occupiers are still trying to figure out the impact of new activity-based workplace (ABW) strategies and hybrid working patterns,” the report states.

This is putting demands for a flexible approach on landlords. At the same time, they are trying to cope with cyclical challenges resulting from rises in interest rates, high inflation and increased construction costs.

The survey also entailed in-depth interviews with industry experts as well as two roundtables.

It concluded that the office has a key role to play in occupiers’ workplace strategies by conveying corporate culture, stimulating collaboration and in the mentoring of new and younger team members. “However, only 14% of occupiers believe their existing workspace portfolios align completely with their business objectives and strategies,” the report’s authors said in a statement.

Demand for flex office space has increased 29% globally since the pandemic, in response to changing demands. But the study showed that landlords more than occupiers expect greater lease flexibility and agility over the next five years, such as new lease structures that allow occupiers to grow and shrink their office footprint within a single contract.

“In a sense, the leasing relationship will need to become more of a partnership between the landlord and occupier,” said Craig Hughes of The Instant Group.

Furthermore, 62% of landlords expect a decrease in capital values with the current valuation model, which only awards long-term contracts.

With the office provider evolving from a space to space-as-a-service approach focusing on operational management of buildings, a new approach to real estate valuations is also needed.

Valuations need to acknowledge the value of providing additional services and amenities, building partnerships between landlords and occupiers and a strong brand and reputation, while also recognising the impact of flexibility and varying lease lengths.

“At the same time, landlords are trying to work out the future in this perfect storm of structural demand changes with demand generally shifting to more flexible and energy efficient spaces with access to amenities and services, while dealing with a lot of cyclical challenges,” said ULI Europe CEO Lisette van Doorn. “With tenants critically reviewing their needs and the building attributes at lease expiry, landlords may not have the luxury for the market to improve but might need to act quite soon to preserve rental income.”