Shift in Office Occupier Behaviour Paves the Way for a Flexible Revolution, Says CBRE
• Technology, economic trends and behavioural changes driving shift towards flexible offices • Investors who successfully adapt products will lead the way for European occupiers • New office developments likely to incorporate a flexible space element from inception
London - Moscow, 14 December 2017, – The rise of the flexible office is the result of dramatic changes in the way corporate occupiers approach their real estate decisions, and will open up opportunities for landlords able to adapt and respond to these shifts. These are some of the findings from The Flexible Revolution, a pan-European report from CBRE, the world's leading real estate advisor, exploring the flexible office market.
Over the past decade the global flexible office market has been growing at an average of 13% per annum. Growth rates in EMEA (excluding UK) and APAC have averaged around 20% per annum, while the more mature and larger markets of the UK and the USA have seen average growth of 10% per annum over the same period. Key European cities like Berlin, Paris and London have all seen strong year-on-year growth of 12 – 21% between 2016 and 2017, which is comparable with markets like New York and San Francisco, where the flexible office concept has existed for longer. The main growth drivers have been technology – such as on-demand apps – economic trends such as rising levels of self-employment – and, behavioural changes such as a greater focus on flexible working styles, portfolio agility and the need for quicker go-to-market strategies. In combination with business disruption more generally, these are producing changes in corporate occupiers’ approach to real estate decision-making, leading to a growing need for flexibility within portfolios. London is the largest market by far, not just in European terms but globally, with over one thousand serviced and co-working centres. The reasons for London’s pre-eminence include the length and relative inflexibility of UK leases, for which flexible offices may provide a solution for occupiers. The Central London market has seen a diversification in the type of occupiers taking space, including a notable uptick in the amount of space leased to flexible space operators. Demand for flexible space has been fueled by an increase in the number of small businesses in the UK since the recession (22%) and heightened political and economic uncertainty. Recent strong levels of take-up by flexible space operators show no signs of slowing. Demand remains robust with some operators reporting close to 100% occupancy of some centres.
New entrants are making their mark on London. A global co-working start-up entered the market in 2014 and has since expanded to over 2m sq ft if space, covering all the main London submarkets, with the majority of offices located in East London near to the ‘Silicon Roundabout’ tech cluster. Other co-working focussed operators, many with only one or two centres are springing up to cater to local demand from tech start-ups, including ad-hoc centres operating from cafes such as Forum in Shoreditch and hotels such as The Curtain in the same area, which combines a members’ club and co-working space. Traditional landlords have also reacted; British Land launched its own flexible space brand Storey in 2017, which will operate within its existing London assets.
From an investor perspective, the growth in this sector presents opportunities and challenges around market access and valuation. The market is adapting to the change in the way tenants are occupying office space, and there seem to be three models emerging that investors can utilise to access the flexible office market; the traditional lease model, a platform model or a profit/revenue share model.
Gavin Morgan, Head of Investor Leasing, EMEA, CBRE commented:
“Investors who can successfully adapt their product will be at a distinct advantage when meeting the changing needs of the European occupier community. Whichever model is chosen, there is clearly opportunity for the investor and developer community to create new flexible office products to meet this diverse range of user demands.”
Stewart Smith, Managing Director, Central London A&T, Occupier commented:
“The rapid growth of the flexible sector can be attributed to fundamental shifts in technology and economy, which has changed how occupiers behave. Each of these in some way is contributing to a structural change in how businesses approach their real estate decisions. The flexible office is here to stay because it addresses the basic occupier need.”
The report concludes that the building of the future is likely to move away from the traditional model of all floors being let on conventional lease terms. New developments will incorporate a flexible space element from inception with new buildings marketed as having floors dedicated for this purpose, along with wellness and other shared amenities. This hybrid model mimics the typical growth trajectory of 21st century business – from inception of idea in accelerators right up to the long-term occupation of global corporates – providing landlords with sustainable tenant retention.
Pavel Yakimchuk, Head of Fit-out, CBRE Russia, said:
“Flexible working environment is no longer a novelty in Russia. International corporations, following their international standards, more than a decade ago brought to Russia such concepts as open space, non-fixed workstations, hot desks, etc. Time does not stand still, adding to our vocabular and our life concepts such terms as agile and co-working that marks the beginning of the next stage of real estate market development. This once again proves close relationship with the European market and the fact that we clearly follow international trends, albeit often with a delay.”
In Q1 2018, the volume of growth in new supply showed an extremely low value and amounted to 37,100 sq m. In January-March 2018, four Class B office buildings were commissioned, the largest of which was the business centre "La-5" near Vnukovo airport.
The limited completions volume will also be common for the following quarters of 2018.
Overall vacancy rate continues to decline for the tenth consecutive quarter, beginning in the second half of 2015. According to Q1 results, this indicator decreased by another 1.3 ppts compared with the value at the end of 2017 and amounted to 12.4%.
In Q1 2018, take-up amounted to 365,000 sq m of office space. This is a record value of the new transactions volume executed for the first three months of the year since Q1 2010 (375,200 sq m).
Users demand was still mainly focus on the lease of office premises. This type of transactions is accounted for 83% of take-up in Q1 2018.
In Q1 2018 the average level of rental rates remained in the ranges of the end of last year.
•According to Q1 2018 preliminary results real estate investment volume in Russia has totaled $150 mln, 4.7 times lower than Q1 2017. For year-beginning low transactions conversion is typical, especially after high conversion level of Q4 2017. Furthermore, investors sentiment was moderate in terms of decision making before March President elections typically resulting to markets volatility.
•Q1 2018 investment volume by 95% is formed by overseas capital, compared to Q1 2017 with overseas investments share of 22%
•Residential real estate investment has totaled $71,5 mln (47% in Q1 2018 investment volume). Office segment share according to preliminary results is 34%, retail sector – 12% and industrial real estate – 7%. A total of c. 80 mln was invested in commercial real estate segments in Q1 2018.
•Prime office yields in Moscow in Q1 2018 were 9.00-9.75%, prime shopping centres – 9.00-9.75% and logistics centres – 11.50-12.00%. In Q1 2018 prime yields range was revised by compressing the lower boundary. Based on further real estate markets recovery and key rate decrease, in 2018 we expect further prime yields compression, started in the 2017 year-beginning.
Despite zero new delivery of shopping centers in regional cities in Q1 2018, construction activity remains high: 10 shopping centers with total leasable area of 298,655 sq m are announced for delivery by the end of the year.
58% or 173,855 sq m of 2018 forecasted new delivery of shopping centers accounts for major cities: Novosibirsk, Yekaterinburg, Ufa, Samara and Rostov-on-Don.
Average vacancy rate in large shopping centers in major cities fell to 6-8% as of the end of Q1 2018. Key trigger of this decrease was low supply volumes over the last two years.
In Q1 2018 a new project of shopping center Mall of Baltia was announced in Kaliningrad (GLA: 42,000 sq m) with opening in 2019.
Russian real estate investment market with a total of $4.9 bln in 2017 has recorded a 3-year maximum with a 9% growth Y-O-Y. To compare, 2016 investment volume totaled $4.6 bln, 2015 - $3.3 bln.
Due to a number of large transactions closed in 2017 retail segment is responsible for a prevailing 32% share in the total investment volume, first time since 2013. Retail segment has experienced the largest in 2017, as well as one of the largest in Russian market transaction on the purchase of Immofinanz shopping centres portfolio. Office real estate segment was second in terms of investment share with 29% in the total investment volume. Industrial and hotel segments were responsible for 10% and 6% respectively.
The volume of overseas investments has reached $785 million in 2017 which is 16% in the total investment volume. Foreign investments has recorded a 4.4 times volume growth and 12 percentage points increase compared to the 2016 historically the lowest result in terms of foreign investors activity.