In an age where no industry is safe from disruption, companies are asking themselves not only how to continue successfully but how to stay ahead of trends and technological innovation. It took Uber less than two years to disrupt the taxi industry in cities around the world. And the pace of change is increasing rapidly. Despite the ongoing shakeup of the corporate landscape, one industry has been particularly slow to change. Business moves fast, but real estate has historically moved slowly.
The future of any business occupying space is less certain than it ever has been, creating an extreme need for a paradigm shift in the way we forecast demand for space and optimize supply. A new methodology not only helps take some of the slack out of the line for both property owners and corporate tenants—it has the potential to disrupt the real estate industry.
With predictive analytics, CBRE is using a new approach with some clients that can help determine the best leasing options to suit a company’s specific needs, taking into account the volatility and uncertainty of its future headcount.
Learning to expect the unexpected
Planning a company’s space needs can be incredibly difficult. How fast is the company growing, and by how much? What new products will exist in the next few years that could disrupt your industry? How long of a lease should you commit to, and should you pay a premium for flexibility?
Here’s how the approach works: Instead of planning for what they think will happen, companies should plan for change, in order to create flexibility in their real estate that enables it to shift as their business does.
Overcommitting to space can cause big issues down the line. Too much space can cost a lot per person, and a huge drain on the company if stuck with a space that no longer works with the work atmosphere they have developed. One way to combat this is to build more flexibility into corporate real estate deals – managing the risk of the client and reducing occupancy costs.
If a company is conducting a property search for a space in a major U.S. market, the expected lease agreement is 5, 10 or even 15 years. The space needed is calculated based on growth forecasts, but with the industries constantly disrupted by new tech, it’s getting harder and harder to predict.
Most organizations plan for uncertainty by creating scenarios with high, medium and low probabilities. Then, often, they take the middle course. While certainly not advocating an end to forecasting, companies should recognize its limitations.
Get rid of the guessing system
The traditional way of spatial planning is essentially a real estate executive asking a business about its future space needs, which all too often results in imprecise estimates. For example, a company could say it expects its footprint to expand for the next three years at 5 percent annually. It might build in an 8 or 10 percent vacancy factor for growth. All this amounts to is an educated guess.
The new approach uses techniques that account for the uncertainty and help companies plan for change.
Imagine a company’s lease is expiring and it’s seeking a new property space. Taking historical headcount data, industry growth data and business estimates, the team at CBRE creates a statistical forecast and then “stress tests” various leasing sizes and options against many different headcount scenarios. Thousands of different-sized leases, along with permutations that offer more flexibility, such as contraction options, are plugged into the algorithm. The professionals then tap market experts to ensure their solutions are actionable from both a business and market perspective.
Shared office spaces, like those run by Regus and WeWork, are rapidly growing and expanding across major urban centers across the world. But it’s not just startups seeking desks for their small teams of employees. Larger, more established companies are embracing this shared, “pay-as-you-go” model as a way to handle volatility in their businesses.
A future proofing model, such as the one offered by CBRE, can be the middle ground between a company signing a 10-year lease for 100,000 square feet based on a best guess, and one willing to take significant flexible square-footage at a shared office space, at a premium.
Create options for mobility and change
These tools can become sharply more powerful in a choppy market. In a down market, tenants will be able to achieve more optionality at a cheaper price. Some landlords might even consider offering a more flexible leasing as a product— for which there is increasing demand. This demand for more flexibility in a lease could help landlords differentiate from competition by offering a product that currently few others are offering,
This is the first step in an evolution. As companies have moved toward agile supply chains, software as a service and business process outsourcing, they will begin to apply these same principles to their real estate. Landlords and property owners will need to adjust the products they offer to respond to this burgeoning demand.
The main change that will occur is in property management. As the entire industry adopts more of a flexible style of operations, the property management will require just as much flexibility as the sales themselves.
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