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Get ready now: 2020 could be CRE’s ‘annus horribilis’

At first glance, it appears that the commercial real estate sector is in a happy place. It enjoyed its ninth straight year of growth in 2018, as rents and valuations continued their upswing across all asset classes, according to JP Morgan. And with that backdrop, CRE professionals were deemed to be ‘generally quite upbeat’ about the industry’s fortunes, in the latest Global Commercial Property Monitor report by RICS.

Yet, with almost a decade of good times under our belts, all the signs are that we might now be best off preparing for something of a shock. The International Monetary Fund has revealed that the 2019 global growth rate looks set to be the weakest since 2009, when the world’s economy actually shrank. There are ongoing trade tensions between America and China. There’s the never-ending political mess that is Brexit which looks set to exacerbate under our new prime minister. And according to JP Morgan, several market analysts have predicted a recession. If it’s broad, they say it will hit CRE harder than other sectors, due to increases in unemployment and pressures on cost.

No-one knows whether the industry will have its first ‘annus horribilis’ in almost a decade. But with this now looking more likely, now is the perfect time to take stock, and get our own houses (or rather, estates) in order, so we can prepare for the worst, while hoping for the best.

While co-working and serviced spaces were once attributed to start-ups, we now see a surge in interest from corporates looking to manage risk in uncertain times.

Here are a number of areas where flexible space can make a difference to your ongoing CRE strategy and portfolio.

PEOPLE:
Flexible office agreements allow organisations to improve the engagement, productivity and retention of their key people. Labour is the highest cost for businesses. It’s estimated that the UK alone spends £10 billion per year on servicing office space for an estimated 10 million workers. Meanwhile, the average occupancy of an office desk can be as low as 30% on specific working days. Further, according to Legal and General, it costs up to 3 times an employee’s salary to replace them. Arguably, it has never been more important to provide engaging working environments, to support retention and become an employer of choice for new talent.

PLANET:
Across the world, businesses are subject to ever-increasing regulation and compliance requirements regarding energy and carbon. It’s no secret that buildings which leak energy also leak cash. The most advanced corporates are saving money and carbon by using sustainable buildings across their estate. In addition simple concepts such as using flexible space that is closer to where your customers are and your employees homes means less commuting and therefore is kinder to the planet.

PROFIT:
After labour costs, physical buildings represent one of the biggest outlays for corporate firms. Inflexible long leases that do not mirror the dynamic way business evolves means corporates end up locked into uncompetitive rates, or paying for space they don’t even need. This is made worse by the knock-on effects of over-paying on business rates and utilities across void space.

In contrast, savvy firms use external expertise to source flexible space in the ideal location, for a flexible period of time. Serviced offices support their growth strategy.

Time for action
The use of serviced offices is predicted to rise to 30% of all office space in the next decade.

In an age where people shop around every year for car insurance, CRE professionals must continually review their office leasing strategy and flexible space agreements to ensure they’re getting best value.

Better still, when it’s not core business, outsource this task to a broker who can scan the entire market and use established relationships to negotiate the best possible rates.

At a time of significant economic and political uncertainty, at least we can be sure that this flexible approach provides an immediate solution and could help to avoid an annus horribilis for the corporate real estate world.

 

Kurt Mroncz is MD of Offices iQ, a global broker for serviced and flexible offices

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