Workspace
Jonathan Steel, head of global corporate solutions at BNP Paribas Real Estate
The world of work is changing fast, and real estate must keep pace. Technology is revolutionising how, where, and what we do at work. More than ever, occupiers require flexibility, while investors continue to seek income security and to protect capital values.
The good news is that occupiers are prepared to pay a premium for space that meets their physical and technological demands and is able to flex in line with their changing business needs.
We are seeing five key areas of interest for corporate occupiers.
Flexible friends
Average office lease lengths in London are just over six years, a far cry from the 25-year lease with fixed uplifts of the 20th century. Landlords have been protected from further declines in part thanks to the rise of serviced offices providers – in just three years WeWork, for example, has grown to become one of the five largest occupiers in the capital, with a footprint of 1.3m sq ft.
But should investors allow serviced office intermediaries to continue to collect the premiums for taking and managing short lease risks? Forward-thinking landlords are beginning to innovate to protect their investment model and keep the rewards that flow from providing flexibility to tenants.
“Core and flex”, whereby tenants rent a fixed square footage and the right to a certain amount of bookable space on a “flexible floor”, is one model that is gaining in popularity, protecting average lease lengths, while allowing tenants to flex their requirements over the life of a lease. More frequently this flex offering is being provided by the developer’s own operation or in collaboration with a known provider.
Dynamic space
“Agility” has replaced “durability” as our overarching business value. Today’s start-ups are capable of growing their staff five-fold in just a few months. The property they occupy and the services it provides must keep pace.
For buildings, this implies the capacity to evolve and be adaptable to different uses, adding to the adaptability and resilience of the organisations that occupy them.
This has implications for how we design our offices. Research has shown that this ability to be flexible is the key to improving productivity, more so than installing slides or trampolines.
We will see more and more services and spaces that are not obviously part of the working world, but that blend time and place, working and private lives. These multifunctional places will be used for fun, leisure and study, according to the needs of the user.
Developers and investors will also need to consider the divisibility of office floors, and whether they are easy for occupiers to rent out, while being mindful of privacy and security.
Wellbeing
Business’s property policies are driven increasingly by the trend towards employee wellbeing, both in and outside work. This begins with the choice of location within a city, and extends through architecture to the design of workspaces.
Service provision needs to evolve to promote employee wellbeing, attract and retain talent, and boost productivity. This requires effective property management to manage services and, using data capture during operation, continuously improve them.
Offering services covering every part of the work-life balance should be seen as an investment in performance, rather than a cost.
Location, location… lunch
Where do employees want to work? Investors need to think carefully about what makes a compelling location.
The urban renewal of transport hubs such as King’s Cross and London Bridge, and the development of new business and transport hubs such as Paddington and IQL Stratford, is transforming occupiers’ choice of locations and disrupting the old hierarchy of locations in the London office market.
Digital connectivity – access to superfast broadband – is also a growing consideration.
Research by Strutt & Parker last year found that “commuting time” and “food and drink options” were the most significant factors in an office location’s attractiveness, mentioned by 80% and 45% of survey respondents.
Interestingly, being in close proximity to industry peers is important to only a minority of employees – a sign that London’s traditional industry clusters may be fragmenting.
From smart to responsive
Investors need to future-proof their investments, and increasingly this means buildings that are smart, allowing them to measure their performance and use the data to improve it. The drive for greener buildings designed to cut energy bills and reduce CO2 emissions has been turbo-charged by corporates and policy makers, and has brought big improvements in. At the same time, widespread adoption of new technologies is helping improve the performance of both offices and homes.
Connected buildings are integral to the Internet of Things, collecting and sharing valuable urban data – something that could in time become a new income stream – and connecting a building to the outside world. The future may be one of cognitive and responsive buildings, equipped with artificial intelligence that enables them to learn and autonomously improve their performance. Is your office ready?
Retail
Joanne Skilton, UK retail at BNP Paribas Real Estate
It isn’t all about the move online. There are plenty of bricks-and-mortar trends emerging in this sector too.
Experiential shopping
We all know that customer satisfaction and enhanced in-store experience is a big driver of growth as retailers stop chasing sales and start focusing on the customer and on dwell time.
Personalisation – an individually-tailored shopping experience based on customer data or social media feeds – will be a key focus, as will authenticity, which is the desire for consumers to understand the provenance of the products they are purchasing and the retailers they are purchasing from.
But all in all it will be about the experience. Personal time is short and people want to create memories, not just buy things. Experience is everything!
One no longer visits a shop for a single purpose or ever for convenience. Now we want to be able to get the whole package: shop, eat and be entertained in one go. Athleisure brand Sweaty Betty is opening a flagship store in London that will sell you the outfit, the exercise class, the post-exercise health café, and also a blow-dry bar for the post-shower tidy up. As I said, experience is everything and creating a connection with the customer ensures repeat visits.
The new department store
The department store of today is the internet. The physical department store as we know it therefore must be poised to re-invent itself for the digital age. Many department stores, particularly outside prime central London, are arguably too inflexible: too big, spread over too may floors, restrained by the physicality of the space. Re-invention is key. Alternative uses will need to be found to drive and convert footfall.
Food and beverage offer will fill some of the gap, as Debenhams has done with Joe & The Juice and Patisserie Valerie, as will pop-up retail.
The key, however, will be to harness all social activity and maximise the relevance of the space at different times of the day, breathing new life into that space, and that of the local area. When the shops close, can the malls become bars, pop-up cinemas, live music venues or galleries?
If department stores do not re-invent themselves, the next casualty could be shopping centres, given that many of them are anchored by these retailing legends. Clever asset management, based on customers’ needs and understanding future proofing is instrumental to future success.
Retail in regeneration
London’s high-profile regeneration schemes – from Stratford, to King’s Cross and Battersea – demonstrate the move beyond creating pure retail spaces to creating visionary commercial mixed-use developments.
This will be seen at the main Crossrail hubs in the coming years, many of which will become new urban centres. Paddington, for example, is set to embrace the structural changes we are experiencing in real estate and particularly in the retail sector, delivering new models, where physical retail will combine seamlessly with a high-tech digital experience.
The regeneration watchwords continue to be big data, experience and curation. Shopping centres can learn from experiential retail platforms such as airports, where merchandise is curated literally flight by flight to be most appealing to whoever is travelling through at a particular time.
Concept stores
Global brands’ use of concept stores will become increasingly interesting in the UK. We’ve already seen people like Dyson and Nespresso rolling these stores out – acting as giant experiential advertising sites.
This year the slightly more high-profile car brands such as Mercedes, Tesla and BMW will become more visible within UK retail destinations, as opposed to edge-of-town parks where they are traditionally found, as landlords start to understand the use of space as well as the rent deliverability of occupiers.
Rents keep rising
Record rents continue to be set by occupiers, despite some softening of the premium market and, in the mid-market, large store and fast fashion sectors, despite the requirement for incentives to be given to dispose of larger stores.
These can be seen where there is strong competition within a particular area from a particular subsector – cosmetics in Covent Garden or prime Jewellery pitch New Bond Street – or where an occupier is able to secure a decent lease term and security of tenure.
This is increasingly important in central London where shops are either owned by large estates, which are increasingly reluctant to offer leases with 1954 Act protection or, in the case of Bond Street, are owned by retailers who are seeking the ability to occupy stores at lease expiry.
Residential
Mark Dorman, London residential development and investment, Strutt & Parker
There are compelling reasons to invest in UK residential housing: the demographics are supportive, the market is undersupplied, lifestyle are changing and there is a pressing need for well-designed, well-located stock.
Retirement accommodation
The UK’s ageing population has high expectations regarding the quality of life and standard of accommodation they desire as they age. Although a minority are financially footloose and able to make use of their increased spare time with travel and leisure activities, the majority are concerned about the affordability of future health and care needs and about their ability to stay independent and maintain their access to friends, family and companionship.
Echoing the wider UK housing market, a lack of suitable accommodation (2% of UK housing stock is designated as retirement) is having a negative impact: with empty nesters lacking an incentive to downsize and deciding to stay in their existing homes, there is less housing stock available for younger buyers.
Platinum generation interesting statistics
■ The number of retirement homes being developed has decreased over time, from about 30,000 pa in the 1980s to 8,000 pa today.
■ 73% of the platinum generation currently have no plans in place for their retirement accommodation or their care provision.
■ 42% believe there is a lack of suitable properties in the UK to downsize into.
■ 17% would consider living in a professionally managed rental product – in other words, a build-to-rent model.
Build to rent
The UK rental market is in a period of sustained growth with private rented households doubling between 2001 and 2014 to 5.4m, or 20% of all tenures. PwC anticipates an additional 1.8m private rental households by 2025. There is a growing body of evidence to suggest that rental is becoming a lifestyle choice, rather than a requirement caused by a lack of affordable housing for potential buyers.
In addition, the Investment Property Forum estimates that the UK has 25% more unmet demand for private rented accommodation than it does for homes for sale, driving the market for BTR.
As the UK begins the delivery of large-scale BTR, examples abound of the best of private rented accommodation within other countries. The US, Germany and Japan, among others, have shown that there is a clear, beneficial relationship between tenants, who are seeking good-quality rental housing, and investors, who are seeking long-term, annuity-like returns.
Urban renters interesting statistics
■ The private rented sector has grown by 82% over the past 10 years to become the second-largest tenure, with 19% of all households in England now in private rental.
■ 9% of greater Londoners prefer to rent – even while the aspiration to own is still a key motivation for the majority of households.
■ Ten different rental tribes have been identified in urban markets throughout the UK. They require a range of rental options from the property industry to support their wide spectrum of needs.
Micromansions
Well located, affordable UK housing is challenging to find, and for those who prize location over space, micromansions may serve as the ultimate living solution. As urbanisation gathers pace around the world, central locations in the most sought-after cities have become too expensive for the majority.
Micromansions offer dedicated small living spaces to those who require short-term housing, or who work in multiple locations and simply need a place to sleep. A careful caveat to this is that these are not the oddities that can be found in every city, where broom cupboards have been converted into a semblance of accommodation, but are carefully designed and planned homes and would be familiar to those in Japan and the US. Whether referred to as a pod, a pocket home, or a microhome, this is not yet something seen on any scale in the UK. One to watch.
Future housing interesting statistics
■ Micro Mansions can be as small as 100-250 sq ft, compared with a typical two-bedroom flat of 750 sq ft.
■ Living alone is becoming more common. Of the 43% of respondents who stated they were currently single and planning to move in the next five years, 75% anticipated staying in a single-person household.
■ Global nomads, or glomads, are generally young people who are open to travelling for employment over long periods of time as they delay life decisions. These individuals or couples are typically the early adopters of new technology. They are likely to be from across the earning spectrum, either those with financial constraints (such as student debt or low-paying jobs) seeking work or, more likely, those whose skills are in high demand and who therefore globetrot to where the challenges and salaries are located. Their requirements will be for short-term occupancy, which may well include housing that is fully furnished or “menu furnished” to their needs. They will want to be located in city centres or vibrant communities where they can take advantage of the local culture and buzz.
Ripple effect dead?
As Londoners adjust to new stamp duty taxes and geopolitical uncertainty continues, the traditional prime London markets have paused. Historically, the London ripple effect would slow the markets, in turn, out through the zones.
However, London is changing. Through our Housing Futures survey work, we know that people are unwilling to compromise on an amenity-rich, connected, city lifestyle, thereby creating a new demand for housing based on convenience, lifestyle and technology. Changing demand has resulted in new boundaries for central London’s residential villages.
A generation ago the prime markets were driven by the desires of the affluent middle class finance professionals. Chelsea, Kensington and Knightsbridge attracted waves of purchasers who valued the period houses, lateral apartments and traditional amenities. Today those purchasers come from all over the world, are entrepreneurial as well as professional, and are drawn to newly gentrified locations south of the Thames, north of Hyde Park and east of Regent Street. Tomorrow, as transport infrastructure continues to improve, the likes of Crossrail will pull them further afield to towns and villages that the bankers of the 1990s would not have even heard of.
Motivations for moving house (% of respondents)
58%: Access to shops
55%: Broadband connectivity
48%: Access to public transport
46%: Proximity to family and friends
39%: Mobile coverage
Alternative building methods
The ability to adapt space is at the heart of the future-proof, sustainable home. The Yo-yo House focuses on flexibility: growing, contracting and evolving with its occupants, offering them different space use over their lifetime.
One example is converting a single-family home to a two-unit home, allowing an adult child to live in his or her own connected flat/space/unit while still retaining the family home. Another is simply being able to move walls with relative ease – a feature that today is very common within commercial spaces.
One way to deliver yo-yo houses is through offsite production. Although not a new concept, it is broadening opportunities through the use of new technology. Whether the production of homes occurs through panelised systems (2D), modular or volumetric systems (3D), sub-assemblies and components (2D or 3D) or through hybrid systems (2D and 3D) these methods all have the ability to innovate the house building industry, help solve the pending construction skills crunch and provide much-needed homes.
