If ever an industry seemed a stretch for an Agile transformation, it might be real estate, organized as it is according to rules and practices that don’t seem to have changed much in decades.
But not so fast; while agile real estate is admittedly in its early days, there’s a strong movement underway in corporate real estate, fed by commercial real estate giants that see a strong need for firms to rethink the way they do business.
One of those leading the way is CBRE, the largest commercial real estate (CRE) company in the world with 90,000 employees and 480 offices worldwide. In a recent white paper titled The Agile Advantage, the Los Angeles-based company issued a call to action: “Welcome to the Age of Agile Real Estate.” The key points: That owners, occupiers, and service providers need to look for new models — grounded in the concept of agility — to help them stay successful in the evolving landscape of work.
“A lot of organizations are at risk of disruption right now, whether that’s due to new companies entering their industry, or through automation of job practices and functions, or because of changing talent demands, and that’s creating a lot of uncertainty,” says Julie Whelan, CBRE’s Head of Occupier Research for the Americas. Moreover, such variables (which influence companies’ ability to predict their futures) also affect their ability to make real estate decisions. To successfully meet this challenge, Whelan says, is going to require a major shift in thinking. “As a result, we’re changing the conversation [and] helping companies see that every real estate decision needs to be seen through the lens of agility.”
What could be happening in commercial real estate that would require such a drastic re-thinking? In two words: co-working. The rapid rise of the co-working industry and related trends such as the increasing popularity of flexible workspace agreements has put conventional commercial real estate companies on notice that they need to adapt, and fast. In particular, the success of WeWork, which is reported to have filed for an IPO, is functioning as a red flag warning that change is here.
“These change agents are retaining the core ethos of the real estate business – the importance of location – while changing perspectives about how the physical space is consumed,” says Jim Berry, Partner at Deloitte & Touche LLP, another big player promoting agility in real estate.
In the nine years since it was founded in 2010, WeWork grew from a single space in New York City to 341 office hubs across 77 cities and 23 countries and was recently valued at $47 billion, growth that has outstripped any traditional CRE. Together with shared workspace competitors such as Impact Hub — which has 92 locations and counting — and Knotel, which has launched 45 locations in the space of a year, these innovators have fundamentally challenged the nature of commercial real estate, which traditionally has been based on long-term commitments.
“Because traditional lease agreements are typically seven to ten years long, that commitment by its very nature is indicating that a company knows with certainty what their workforce will look like during that period,” says Whelan. “ And that’s the piece today that’s really difficult. While companies have had difficulty estimating their needs in the past, the reality is that now that uncertainty is escalating.”
The answer to the real estate challenge: agility
Definitions of agile real estate vary, but CBRE’s is a good place to start: “Agile real estate consists of workplace environments and space agreement structures that are dynamic and nimble in supporting organizational objectives and employee needs— today and tomorrow.”
Changing tenant and investor expectations require a more nimble and flexible business model, says Berry. “Once CRE companies are ready to change their mind-set, agility tends to be the most important factor that can enable them to rethink the way they approach change, remain competitive, and grow.”
In fact, Deloitte & Touche considers an agile mindset such a central requirement for success that they titled their annual Commercial Real Estate Outlook report for 2019 Agility is Key to Winning in the Digital Era. As far back as a year ago, D&T warned in their 2018 report that real estate companies would likely have to take some risks and embrace change to adapt to the future.
“And since then, we’ve seen these factors occurring at ever-increasing rates, which has continuously challenged companies to deal effectively with the relentless pace of change,” says Berry. “Traditional rules of the road might not work fast enough to provide the agility CRE companies of the future will likely require.”
Agile real estate isn’t just much about rethinking how much space a company needs – and how long they lease it for – but how it’s used, and how flexibly and efficiently it can be adapted, enhanced, and reconfigured. And a big part of the mind-shift required in becoming agile is to learning worry less about the physical attributes of a space, and more about the services and features available there.
Or, as Whelan puts it: “For a long time the main focus of commercial real estate was the necessity to house the workforce, but what we’re saying now is that real estate can be used as a tool to attract, engage, and retain your workforce. It’s a subtle but important shift in thinking.”
Agile real estate supports employees
Attracting and retaining top talent is indeed one of the major challenges facing companies in today’s low-unemployment, highly competitive market. Given that skilled workers can afford to be very selective in choosing an employer, a well-configured workplace can be an important asset in that battle.
“Your workplace is one of the more apparent ways that you can show potential employees what your work culture is all about,” says Whelan. “When a candidate comes into the workplace, or even when external parties visit, you want the investment you make in your employees to be a sign of the value you place on them. A workplace done well can engage employees and keep them happy, and that turns into employees who want to stay.”
This is another area in which co-working spaces have excelled, making workplaces into comfortable social hubs where people connect and interact in locations that are convenient to them.
“WeWork’s goal is to create not just a functional but also a memorable experience through a vibrant ambience, varied open-seating options, amenities, and networking opportunities for the on-the-go millennial and Gen Z workforce,” says Berry.
Overcoming resistance to change
Historically, the corporate real estate profession has been relatively change-adverse, and was very much budget-driven. “You worried about the physical aspect, whether you were delivering a solution on time and on budget, and then afterwards you worried about maintaining space and equipment,” Whelan says. “That skill set is still important, but now it’s largely outsourced to companies who do that at scale. That means those left in the corporation need to be relationship managers, change managers, and influencers, and that’s a very different skill set.”
Or as Berry puts it: “It’s hard for many traditional companies to see the appropriate path to transition from property management to augmenting tenant experience.”
To help them get there, firms like CBRE and D&T are offering strategic advice and models to help those in decision-making positions plan in a more adaptive way. “It’s shifted to a much more strategic role than it’s ever been before,” says Whelan. “We talk to our clients about how instead of being an order-taker, they need to be an order-maker or order-shaper, helping give their internal clients a different idea of how they can solve for their workplace needs.”
Part of that responsibility is helping real estate teams track occupancy and utilization data more specifically in terms of who is using space in what way, rather than simply tracking the number of desks and offices, or the number of badges entering a building. In this way, a company might discover that only two thirds of desks or cubicles are actually being occupied on a given day. “The data are a powerful way to shape the conversation,” says Whelan. “Data collected through sensors and other technology available today can uncover space utilization insights, which open up the conversation around how much more effectively assets could be used.”
To help push the conversation forward, CBRE created an Agile Knowledge Hub featuring case studies and other resources useful to those interested in joining the agile real estate movement.
Behind the curtain of commercial real estate is real estate investment – the financial vehicles in which real estate properties are held as portfolios. Investors, too, are facing more risk from the pace of change, and looking to agility as a strategy for protecting their investments. The surveys that go into D&T’s 2019 Commercial Real Estate Outlook report showed that real estate executives aimed to diversify their portfolios by upping the percentage of investment in newer and emerging business models and thematic investments over traditional real estate holdings.
“Over half of the survey sample aims to invest or increase investments in properties with flexible leases, and 44 percent plan to do so for flexible spaces,” says Berry. “Investors seem to realize that their investments should be tied to the changing nature of work and tenant preferences.”
Blueprint for change
Those in the forefront of the agile real estate movement have a number of concrete suggestions for ways commercial real estate companies and teams can increase their flexibility and reactivity to respond to market demands. One is to increase what D&T terms “tenant centricity,” both by providing the services tenants want and by creative use of technology — including artificial intelligence (AI) — to keep up with tenants’ needs throughout the lifecycle of a tenant’s lease.
An example is so-called “mixed reality,” which uses augmented and virtual reality to allow potential buyers and tenants to visualize a new property using a 360-degree immersive design experience. The technology is interactive, allowing potential tenants to try out different finished site options to see how each one would feel. Since such technologies don’t require physical proximity, they allow commercial real estate companies to expand their reach to global clients.
Another strategy is to diversity the type of tenants and think beyond traditional uses in order to increase occupancy as times change. One example: Foresighted malls losing their conventional big box stores are revamping the space for mixed-use purposes, adding incubator spaces and co-sharing work facilities.
And what about the tenants of the future? One of the biggest challenges facing real estate companies and brokers is the need to predict future demand years down the line. How helpful would it be to have a crystal ball showing what the companies of the future might look like and what they will be looking for in there work spaces? Combinations of technologies such as AI, Internet of Things (IoT) and predictive analytics can be used to foresee the future tenant universe and build, re-develop and tailor buildings to anticipated needs.
A case in point is that of Northwestern Mutual, which began searching for an agile solution to its space needs when the lease on its aging Los Angeles office was due to expire. With Los Angeles its fastest-growing market and a strong need to attract young, engaged advisors, the venerable blue chip insurance company sought a new approach, one that would encourage collaboration and allow its workforce the mobility and flexibility they needed.
The result was a 25,000-square-foot “free-addressing” space – a 38 percent reduction in square footage — that traded space-hogging private offices for a wellness center, espresso bar, and concierge-based menu of activities and amenities in a more central location with stunning views.
Case studies like these, documented on CBRE’s Agile Hub, are spurring an ongoing conversation around sharing best practices. “There isn’t a client that I talk to where this subject doesn’t come up in some way, shape or form. They’re all engaged and listening,” says Whelan.
“And like everything else agile, it’s an iterative journey. There are going to be decisions that we learn from. You act fast, learn what works, and shift accordingly, that’s the beauty of it.”
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