AVOIDING OBSOLESCENCE

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People as a new asset class for buildings.

The output quality of occupiers has become a new metric for how a space provider’s service is qualified and valued. In a market where “don’t give me an office, give me a productive workforce” becomes a new industry standard, workers and users become a new asset class for investment by real estate companies, not just occupiers. Without an ability to answer on equal levels a mismatch between supply and demand occurs, resulting in resentment of contract or loss of customer to competitor.

CapEx vs OpEx

- the modern battle for future proofing commercial assets

As investor metrics increasingly become set to occupier performance, addressing biological, cognitive and psychological needs ensures resilience. This has been made elsewhere in business by the work of Eric Von Hippel (2007) (MIT Business School) who has noted that “70% to 80% of new product development that fails does so not for lack of advanced technology, but because of a failure to understand users’ needs”.

In a competitive landscape of diverse products (offices) future proofing becomes harder and risks more acute. The great operational risk to commercial real estate owners are void periods. This can be either when a building is brought to market or in its second or third leasing cycle. At a recent Bisnow one day conference, Harry Badham, AXA-IM Real Assets Development Manager, related the emerging smart-building narrative to the green building narrative that preceded it. He made the case of recent buildings saying “did we get more rent for a green building, absolutely not. Did we rent them faster, absolutely!”

A simple financial example of a 2nd generation 15,000 sq ft office void in London for 6 months will cost an owner around £375,000 in lost revenue, £150,000 in business rates and £150,000 in service charge. This is excluding refurb and reletting costs.

When spreading this across the lifetime of a multi-let asset the incentive for capital expenditure in human-centred services and design becomes a simple de-risking process to operational success.

In businesses, it typically costs 3-4 times the annual wage to replace lost talent - welcoming cultures, services and incentives are used to safeguard productivity and operational performance. In the case of real estate, buildings should be seen in the same way. Buildings should always live in beta, constantly adapting to human needs to achieve their purpose but not without authenticity, purposefulness and resilient foundations.

Given the high risk nature of void periods, methods to avoid operational risk is now a key hallmark of briefing sustainable real estate projects in early stage planning. Operational expenditure is the ongoing post-occupancy analysis of how assets are performing.

 

Josh Artus