Unlocking CRE Value in a Hybrid Work Environment

April 13, 2021

By Haniel Lynn

post-covid landscapeWe won’t know for a while exactly what the extent of the pandemic’s effects are on the commercial real estate world, but they’re certainly going to be significant. Already, the way tenants use buildings and how they value amenities and other offerings have shifted.

That has raised a big question for many operators as businesses begin to bring employees back to the office: How do you deliver value in a hybrid-working world?

The value proposition is a crucial one moving forward. Kastle’s back to work barometer still shows the average occupancy in 10 major cities across the past month being well under 40%. While occupancy has ticked up slowly since, it’s largely been stuck well below the pre-pandemic levels since last March.

Some of that, of course, has been out of necessity. Stay-at-home orders at the start of the coronavirus crisis and repeated COVID spikes have dampened return. In that time spent out-of-office, though, businesses adapted, using (and eventually embracing) remote-work technology to redefine what counted as a “workspace”.

It’s too early to say exactly how this reconfiguration of work will affect tenant use of office buildings, but many firms are already planning for an environment where workers spend time both at home and the office. Hybrid work spaces will be more common. And even the time spent in the office will be shorter as some people opt to get out as soon as their work is done.

CarMax has offered one possible glimpse into the future of office life with a new office facility opened earlier this year in Richmond. Built for planned capacity of 750, it’s now expected to host between 200-300 people per day as the workplace has been redesigned for the hybrid model. Some areas offer an open floor plan with socially-distanced individual workspaces, while others focus on collaboration spaces, where coworkers can work together both in person and/or alongside workers who dial in (video-call in) from other locations, including home.

That’s new construction, though. For existing buildings, operators are seeing a flight to quality underway. That presents opportunities for owners and operators.

Tenants are looking for upgraded facilities that meet their needs. In fact, over half of all new leases signed during the pandemic have been concentrated in Class A properties – and the premium for newer assets is more than double the pre-COVID rate, according to a Cushman & Wakefield report.

Unfortunately, not all new assets hold value for tenants. Shared amenity spaces (like fitness centers, common dining areas and game rooms) and concierges do not hold the appeal they used to.

First, there’s a value mismatch. Tenants used to value vibrant common areas, because the office was a place where they spent a lot of time and these spaces were a respite from “head-down” work. Today, they don’t want to stick around – and they certainly don’t want to go to the fitness center if they’re concerned about the health of the people around them.

There’s also an execution failure, where amenities that are oriented toward tenant needs aren’t always usable by those tenants. Workers, for example, need to know whether spaces like shared conference rooms are free or in use. They also need to be able to access that space in a way that easily fits into the way they work (think easily reservable from their calendaring system).

Amenities need to be seamless to use if you hope to see value from them. If you don’t fully integrate new amenities into the way people make decisions and enable those people to access them easily, it’s not going to be valued in the current environment.

And tenants don’t always make it easy to know if these assets are hitting the mark. Because they don’t have metrics showing things like the number of reservations per day or the overall percentage booked, there’s a disconnect making it nearly impossible for them to know how valuable the amenity is to them.

National office demand from 2022-2030 is forecast to be 15.8% lower, meaning supply will exceed demand, putting pressure on leasing income. But the situation is far from hopeless.

As you design building upgrades, amenities and experiences, keep three words in mind: Integrated, informed and individualized.

integrated dataIntegrated: Integrated is the assimilation of building data into a common data infrastructure. By pulling the data from your building’s systems, including access control, parking, video surveillance, turnstiles and more, you can have a single holistic assessment of your building’s performance, which gives you the ability to understand what’s happening across these different systems in your building.

 

 

informed occupancy dataInformed: When you have that baseline of integrated data, you can develop insights to deliver to end users, letting them make smarter decisions. They might, for instance, be able to see how many people are in the fitness center and if it’s an optimal time to go. Or they could share their parking spot with a coworker on days they won’t be at the office.

 

 

individualized dataIndividualized: When you integrate your data you can create proactively personalized experiences. The system can anticipate the needs of tenants, alerting them to open collaboration rooms near them when they arrive at the office or reserving a parking space for them.

By improving a tenant’s business through these methods, you can improve your own, as measured by tenant satisfaction, lease renewals, higher leasing income and higher occupancy rates.

Work has changed, and building operators need to change also to add value for tenants and to ensure their property differentiates itself in an increasingly competitive market. That, in many cases, will require a review of current and planned amenities to determine if they’re creating value and improving the business of your tenants.

Use data to better understand how the building is being used. By helping tenants enhance their business performance in this new working world, you’ll not only keep them at your building, you could see revenues increase over time.

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