Flexible leasing isn’t going to change – The Property Chronicle
Select your region of interest:

Real estate, alternative real assets and other diversions

Flexible leasing isn’t going to change

The Professor

WeWork, with its space-as-a-service model, began a chain reaction that will have a lasting impact on the commercial property market

The term ‘smart building’ first appeared in an Iron Man comic from 1994, according to Propmodo’s Franco Faraudo. However, the real hero in the tale of proptech is undoubtedly WeWork – despite its recent troubles – and its flexible leasing model, which heavily relies on customer retention. Accordingly, its offerings need to put user experience at the core of their operations, something previously alien to landlords, whose main focus has always been on long leases and upward rent reviews. Considering we spend half our waking lives at work, why have we have put up with mediocrity in our workplaces for so long? Fortunately, times are changing. Just as green credentials are beginning to fetch a premium, improved user experience too is expected to command higher rents in the long run.

The rise of space-as-a-service is all about the efficient use of office space, with spare capacity a central concept. Spare capacity, as an economic term, describes the potential for use of an object, service or space not currently being used. It is closely linked with the economic concept of opportunity cost, meaning the lost value of all other alternatives when an individual choice is made. Put simply, it is the unrealised potential of an unused resource through its inefficient allocation. Currently, economic allocation of resources relies on the free market mechanisms of demand and supply, which intersect to create an equilibrium price at which a certain quantity of any resource is consumed. 

Transaction costs will affect the demand for a good and thus the price, and critically the quantity consumed. As economist Carl Dahlman said in 1979, the cost of any transaction can be divided into three separate categories:

  1. Search and information costs – to determine that the required good is available on the market, its lowest price and so on.
  2. Bargaining cost – required to come to an acceptable agreement with the other party to the transaction, drawing up an appropriate contract and so on.
  3. Policing and enforcement costs – to ensure the other party sticks to the terms of the contract, and if necessary the cost of taking appropriate action.
US city vacancy rates versus co-working supply
Source: Fiorilla, 2018

The rise of space-as-a-service will not only enable building vacancy rates to decrease but also allow an increase in the desk utilisation rates of individual offices. The average workstation in central London costs £17,5000 a year, yet the average desk utilisation rate is only 45%. In an office containing 500 workstations, a system that enables 100% desk utilisation could generate almost an extra £5m a year, according to Yodi Stanton writing for MIPIM PropTech. With the barriers to entry in the flexible office market low – as most coworking space involves small locations – competition among the plurality of small players is likely to grow, looking to capitalise on this £5m opportunity. 

The ability to shorten leases and subdivide real estate spare capacity has also created a social shift within the commercial occupier market, driving it closer to the ‘customer is always right’ model found in hospitality. The end user of the space can now vote with their feet and leave without penalty if a space does not meet their expectations or requirements. Therefore, a strong user experience is now a highly sought-after commodity. Accordingly, we are witnessing an arms race of amenities, as managers try to include as many luxuries as possible in their service offering. I for one, love free beer and am very grateful.   

Subscribe to our print magazine now!