The onslaught of IT and other trends that are fundamentally changing the workplace will ultimately lead to shorter office leases, a pan-European panel of office experts have agreed at the annual conference of the European Public Real Estate Association (EPRA).
'We can't predict the future, but we can figure out what won't work,’ said Olivier Elamine, CEO of Hamburg-based office REIT Alstria. 'Long-term leases are set to become ancient history any time soon.'
New technologies are making existing office buildings obsolete well before the end of their traditional 50-year lifespan, he added. ‘That means we have to trim out our business models and be prepared for shifts. The quality of the real estate and the operations will become more important in the future.'
While big corporate customers may still require bespoke solutions for a period as long as 20 years, on the whole leases are getting shorter, agreed Rob Noel, CEO of the UK's largest office REIT, Land Securities. Moreover, some 95% of all office transactions in London are smaller than 5,000 m2, he added. ‘The business model will change, we have to adapt.'
It's a fact of life that buildings depreciate and that capital recycling is necessary due to mispricing or obsolescence, he said. 'When we get to a point that buildings don't depreciate, that’s when we won’t need to recycle capital.'
Long-term ownership of London offices is a suicide mission
Long-term leases can create a false sense of security, he added, pointing to an example in London involving a 25-year lease brokered in 1989 for a 70,000 m2 property by a single tenant. 'The rent didn’t move until 2014 so there was a nominal fall in value in the 25 years and then the building became empty. That property underperformed pretty well everyone. Long-term ownership of London offices is a suicide mission.'
Social trends are also conspiring against long-term office leases, Martin Laws, a consultant at Deloitte, told the delegates. The whole model of talent is becoming more complex due to the advent of phenomena such as crowdsourcing, robotics and the demands of the millennials. Young people coming into the workforce want a better work/life balance, greater flexibility of work hours and a creative and flexible working environment, he pointed out. 'By 2025, millennial will account for 75% of the working population.'
The type of work we do is also changing due to advances in technology. Some experts claim that more than half – or 56% - of financial jobs could be automated in the future, Laws said. The good news is that for every job lost to technology, there are twice as many new jobs. But that creates a new set of challenges, he argued. 'At the World Economic Forum we learned that two thirds of children that are now entering primary schools will enter jobs that don't yet exist today.'
The new rules of the game mean that real estate must become a platform, a tech enabler, a provider and even an innovator, he continued. 'Different models are already out there, it's all about optionality and tailoring.'
Office buildings are evolving and incorporating new technologies and infrastructures but landlords need to put the needs of new generations of workers first, agreed Land Securities' Noel. 'The millennials are fundamentally different to the people that went before them. They are more mobile, they share, they have a higher social conscience and are increasingly demanding.'
