Expo Real: Smart, flexible space to transform institutional office markets

The rise of ‘smart’ buildings and flexible space will transform office markets, posing significant challenges to the investment industry, delegates heard at Expo Real in Munich this week.

During a panel session hosted by JLL, fund managers responded to research that predicts that 30% of most institutional office portfolios will consist of flexible space by 2030.

Guy Grainger, EMEA CEO at JLL, provided a preview of the report – due to be published on Monday – which also concludes that best-in-class smart buildings will command higher rents than comparable grade-A assets.

The research says one in three offices will one day be flexible, offering creative, collaborative space that can be adapted to suit tenants’ needs. But, Grainger said, this implies a major shift for investors as flexible space probably makes up less than 5% of portfolios today.

The estimation was validated by institutional investment managers on a panel moderated by IPE Real Estate senior reporter Russell Handy.

Georg Allendorf, managing director and head of real estate Europe at Deutsche Asset Management, said office portfolios were evolving – especially in the US – but flexible space still represented close to 5% of assets owned.

Phillip La Pierre, head of investment management Europe at Union Investment, agreed with this figure, although he said he hoped to increase it.

But both managers agreed that traditional tenants – for example, law firms – were still creating demand for traditional space.

“Many tenants still have old-school approach to office usage,” said La Pierre. “As long as we can cater to tenant needs, that ratio [5%] is not concerning.”

One of the impediments to the creation of more innovative space is the cost, which is often shared between landlord and tenant.

Ulf Pleschuitschnig, managing director at Morgan Stanley Real Assets, recalled an example where a tenant looking to re-lease wanted a more creative “Google-type” refit – until its head office steered it towards a cheaper and less transformative refurbishment.

“There is an offset between how much customisation a tenant wants and the costs of that,” Pleschuitschnig said. “So we have nudged tenants to a layout where work and investment you have to do after five years is limited.”

Grainger said he had seen similar situations where “you can get so far and then costs stop it”.

But, he said, “buildings are becoming more about people” – especially as human resources departments become more involved in workplace design.

Buildings that are built and operated with people in mind will, he said, ultimately generate higher rents.

Employers are competing for talent and at the moment that requires understanding the sort of space the Millennial generation wants to work in – and where that space should be located.

“Corporates are trying to de-corporatise,” Grainger said. “That has been a real shift. They see tenants all going to Google. Why are they going to Google? Oh, because it’s cool to work there.”

Allendorf said Deutsche Asset Management had carried out research on rental growth in the US and found a direct relationship with the proportion of Millennials in the local population.