Traditional office landlords need to be more flexible

The commercial real estate sector is facing a moment of pronounced instability. Hit by devaluations, high interest rates, the skyrocketing cost of borrowing and rising overheads, the sector must act quickly to safeguard the long-term security of assets.

No part of real estate is having an easy time of it. Even the housing market is wobbling. But the industry’s biggest challenge lies in traditional office real estate.

Tenant occupancy of traditional space remains significantly lower than it was prior to the pandemic as businesses continue to embrace hybrid and flexible working.  If they are to weather the economic storm, office landlords need to recognise the damaging impact the downturn could have upon their portfolio and explore what can be done to reduce risk and optimise their existing assets.

Lower occupancy dents office landlord revenues – and occupancy is going only one way at the moment. According to LSH, 75% of workspace occupiers are reducing their office space by 20% to 40%. Huge multinationals are downsizing their offices across the world, with the likes of tech giant META investing an enormous $3bn in the reduction of its footprint and law firm Clifford Chance relocating to smaller premises.

Reflecting the enormous shift in working culture that the pandemic sparked, with flexibility and hybrid working becoming the norm, many businesses no longer require excessive floor space with a desk per employee and instead are prioritising smaller yet scalable options.

With a potential recession still looming, more and more businesses are expected to embrace this model to cut costs. Gone are the days of decade-long, inflexible leases: businesses are plagued with too much economic uncertainty to commit to such terms and instead require greater flexibility.

To boost occupancy levels and, in turn, revenue, landlords must search for effective solutions that capitalise on this rising trend.

Amid doom and gloom surrounding traditional offices, flexible workspaces are a beacon of hope. Among flexible workspaces, occupancy rates have risen to 90% since the pandemic as businesses search for the flexibility and cost-efficiency they now need.

Yet they remain a badly under-used method of diversifying a commercial building and boosting its value. Any investment portfolio that lacks diversity bears enormous risk, particularly as macroeconomic headwinds take greater hold. Introducing an element of flexible workspace offers a simple way to broaden the prospective pool of tenants.

Furthermore, overreliance on traditional office space demands greater dependency on the success of individual companies. In a single tenant workspace, if the occupier’s business fails, a landlord will be left without an income stream. In a flexible shared workspace, however, if a business goes under, the landlord’s income is protected by the five, 15 or even 100 other tenancies at the workspace.

Introducing flexible workspace needn’t be difficult. Working with a flexible workspace provider that handles tenant conception, infrastructure, tenant procurement and operations, streamlines this transition for commercial landlords, enabling them to stay competitive in a challenging market.  

Although this period will naturally bring challenges, reduced demand for traditional office space amid a downturn is not an insurmountable hurdle. Landlords should instead regard it as an opportunity to meet the demand of the post-pandemic market and ‘recession-proof’ their portfolio through the introduction of flexible workspace.