Office trends across the board?
Here are a few things that I noticed at the end of last year:
Agency fees for office lettings are increasing
This is because there are more flexible deals happening (which always meant higher fees) and because landlords are starting to use the brokerage model to pay acquisition agents. I saw enhanced fees offered a few times at the end of 2022 and I think it will continue.
People are starting to question the efficacy of hybrid working
It used to be viewed as ‘the answer’: now I’m noticing people are more binary and tribal – they’re more likely to be either remote-only, or an office evangelist. This means the occupier market is becoming more fragmented. Now it’s more important for landlords to understand the individual occupiers, rather than assuming that everyone in a certain sector wants the same thing.
Occupiers are taking less space
It’s becoming clearer to businesses that they don’t need as much space as originally thought once they review the last 2 years of occupancy data. 2022 finished with some great take-up stats (10.9m sq. ft. which is up 27% on the year before according to Costar) but is still below the long-term average of 12.3 million sq. ft. I sense that this is musical chairs as occupiers rightsize their offices. I think take-up will remain reasonable but below average as net absorption slowly decreases.
Landlords are starting to provide more communal spaces
They realise the potential to win new occupiers this way. But it’s definitely not mainstream yet and there is still very little of this being offered outside of the coworking spaces. It feels like a lost opportunity in many buildings.
The greatest opportunities for landlords in 2023?
Everyone is waiting for a buying opportunity. No doubt it’s coming. But finding a deal that stacks with poorer inputs is going to be a challenge. Finding a seller at market value will also be hard.
It seems like confidence in real estate is low already. Interest rates are rising, values are falling, and occupier demand is likely to be subdued. That seems like an opportunity to be counter-cyclical….but everyone is thinking the same thing at the same time, so I wonder if that is really the case.
Regardless, landlords must have conviction in their sector and then outcompete the market. It’s an opportunity to be brave, hardworking, and try new things.
The clear opportunity is for landlords to become more involved in delivering service and operations. The market is heading in that direction, and those who are willing to get their hands dirty and learn how to use technology to serve occupiers efficiently will do very well.
The greatest challenge for real estate in 2023?
Working out whether higher rates are here to stay. This is either a blip to tame inflation or a shift to a period of higher-for-longer rates. Being on the right side of that bet is the greatest challenge. And for a generation of market participants who have never seen interest rates increases, that is going to be tricky.
I am 38 and I just about remember the last time rates were this high, at the very start of my career. So being adaptable and seeking out the experience of others is another challenge.
Aside from market forces, remaining relevant is a big task. Office space used to be a de facto utility. Now it’s a ‘nice to have’. So we must all convince business leaders that taking an office adds value to their organisation and their people.
The way to do this is by providing high quality flexible space for a fair price. In 2022 I learnt there’s still a deep market for great value space.
BY JONATHAN VANSTONE-WALKER
CURIOUS TO LEARN MORE? READ PART 2 HERE.
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