Flexible working is transforming the real estate landscape, disrupting the traditional relationship between a landlord and their tenant customers.
Landlords can capitalise on the flexibility trend by curating their own space options according to AMP Capital Head of Real Estate Research, Luke Dixon, who says analysis shows that flexible space improves the productivity of tenants, increases retention rates and attracts rental premiums.
“In a cycle that is becoming less dependent on yield compression, and more focused on capital growth, landlords will need to think innovatively around how they boost incomes in their assets,” Mr Dixon said. “Flexible office solutions are one way to tackle that.”
“Flexible space isn’t just a trend, it’s an important value driver for landlords and current market dynamics are very supportive of this growth,” says Dixon.
Flexible and co-working spaces are those where workers do not have their own desks, or sometimes where different companies share open-plan environments. In today’s era these premium spaces usually come with common areas such as kitchens, lounges and even foosball, and a purpose to create interconnection between workers.
In the current environment where vacancy rates are dropping below 4 per cent in the Sydney and Melbourne CBD, and occupancy costs are escalating, flexible office accommodation can benefit employers by allowing them to fit more people in, taking into account employees sick days, holidays and out-of-office days.
Landlords can also benefit because they can charge a premium, according to Dixon.
“That means space in those markets is becoming scarce,” says Dixon. “It’s becoming harder for tenants and customers to access those markets. Flexible space providers may provide some shock absorption within that market and also provide premiums to the rents that are already being charged.”
Sydney has seen rental growth rates of about 15 per cent per annum for the last three years and now Melbourne is achieving up to 12 per cent growth per annum on an effective basis.
Occupancy costs are rising sharply as vacancy in Melbourne & Sydney falls. Sydney Prime Gross effective rents are up by 60 per cent since 2014, and Melbourne’s lifted by 24 per cent, Dixon says.
“Flexible space operations offer higher premiums than that on a per square metre basis and also lower floor space ratios per person, which means essentially more bang for our buck out of the assets that we own,” says Dixon.
Premiums on rents in flexible space vary according to the size and range of flexibility on offer, with premium levels rising as flexibility rises.
The key to the equation is around floorspace ratios, and meeting rooms, with most coworking spaces offering floor space ratios of between 5-7sqm per head, well below the corporate average of 12sqm per head.
“Looking ahead, this is important to landlords not only as a consumer offering where we are making sure we are satisfying our tenants needs for their businesses, but also as a return on their investment.”
“And for landlords, this is about making sure we maximise the income we can get for those assets,” Dixon says.
Flexible office accommodation is one of the fastest growing office categories in Australia, having risen 297 per cent since 2013. Globally more than $5 billion has been committed in venture capital to this asset class, with a further $2bn in mergers and acquisition activity, he says.
There are three most typical ways landlords can engage with flexible space, firstly through a traditional lease. They can bring in a third party to operate a service within their own building. The second option is a profit share or revenue share arrangement where the landlord goes into a partnership arrangement with the operator and shares in their success.
The third, and Dixon believes the most value generating option for landlords within the market, is to disrupt the market themselves and create their own platforms across their own assets.
“Obviously you need a large pool of assets to make this quite successful and scalable but large institutional portfolio managers will have a natural advantage in this market,” he says. “They have existing relationships with deep pools of tenants that will enable them to grow quickly and bring revenue into those assets.”
Ultimately the size and scale of the commercial landlord will impact which way of getting involved in the flexible office environment works best. Investors should be looking to see whether they have selected one that has the right fit.
While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.