The office-space rental market is undergoing a fundamental shift, from the hitherto inflexible leasing of a fixed amount of space for a fixed period of time to something that better complements the dynamic nature of many 21st century businesses. Grosvenor Engineering Group Managing Director, Nicholas Lianos, explains the new phenomenon—‘space as a service’—and discusses the opportunities this offers.
There was a time when it was established practice for a company to own its own buildings. There was a certain air of dependability that came with doing business with an organisation invested in bricks and mortar. But then came the realisation that assets in the form of buildings effectively tie up capital that could be better employed to invest in new processes, machines and technology, and as a result it became more commonplace for companies to lease their office space instead. In effect, the new space-as-a-service trend is emulating the historical move from property ownership to property leasing, but is taking matters a step forward to further enhance flexibility.
Originating in North America, space as a service is a concept that is finding traction in large cities throughout the world, including Australia. The difference between traditional office leasing and space as a service is comparable with the move from car ownership to the use of Uber, the purchase of CDs to Spotify, or DVDs to Netflix; it’s a transition from products to services, ownership to access, and elasticity without the overheads. Similar to serviced offices, space as a service pushes the idea to its logical extreme to deliver greater levels of embedded amenity and freedom, without any of the customary hassles associated with long-term leases.
Instead of dividing a building into a number of empty stand-alone spaces for tenants to fit out themselves—as with a standard office lease—landlords are now creating more modular office solutions that incorporate different zones specifically designated for focussed work, brainstorming and meetings, video conferencing, presentations and social activities. Not only are these areas fully furnished, but they are also equipped with a full range of cutting-edge technology services to meet the expected needs of all tenants.
These spaces can be rented by the year, month, week, day or even hour to meet the exact needs of different users. For instance, a company might need office space for 30 employees with permanent access to social areas, but also have occasional requirements for additional desk space when in-house personnel visit from other offices, plus periodic access to meeting rooms, video conferencing facilities and presentation spaces. Here, standard requirements might be covered in month-to-month lease agreements, while other areas are rented by the day or hour.
As a business model, space as a service appeals to landlords and tenants alike. The arrangement benefits landlords by enabling them to charge a premium for space-as-a-service offices, while tenants can enjoy the ultimate in flexibility from the arrangement, only paying for the exact areas they occupy for the precise amount of time they use it.
Just as companies once sold off their buildings to free capital to invest in facets of their businesses more closely tied to production, companies today—especially start ups—can embrace space-as-a-service solutions as a means to alleviate many of the historical expenses that traditionally accompany the creation of a new business venture. Space as a service frees these companies from committing to a fixed lease on a fixed piece of real estate, frees them from the cost of fitting out these work spaces, frees them from providing and maintaining servers and communications infrastructure, and frees them from the hassle and expense of expansion (or indeed contraction) to meet evolving business needs.
The downside for the tenant is the relatively high cost per square metre being charged. For the landlord, disadvantages include the loss of security that a standard lease delivers, the increased workload in optimising occupancy rates for what is now a high-churn tenancy, plus the cost of fitting out, equipping and maintaining all the spaces within the building.
In many respects, real estate is becoming a tech platform, as tenants become ever more demanding—with regard to their personal comfort, the ambience of their surroundings and the levels of amenity provided—in order to optimise their work experience and maximise productivity. Many companies, for example, are finding that in order to attract top-level employees, the quality of the working environment is increasingly becoming a deal breaker.
The challenge for landlords is to keep their property portfolios as fresh as possible by investing in the latest property technology—proptech—offerings to meet the ever-escalating demands of tenants. In this respect, space as a service actually has more in common with the hospitality industry than the traditional office rental market, with the facility manager role morphing into that of a concierge.
For technology solutions providers, such as Grosvenor, space as a service represents an intriguing concept that offers exciting opportunities ahead. Many such companies will elect to partner with other best-of-breed solutions providers to develop integrated technology packages to meet current and future tenant expectations. Grosvenor believes that the next big technologies may include plug-load management and intelligent access control solutions. Plug-load management technology, for instance, can integrate with building dashboards to monitor plug-in appliances, learn usage patterns over time, and develop strategies to minimise energy consumption.
In Australia, the proportion of space as a service as a percentage of total office rental is still in single figures, although growing steadily. Key providers—including WeWork, Regus and Servcorp—are collectively making significant inroads into office rental markets, particularly in Sydney and Melbourne. While space as a service is extremely unlikely to ever account for 100 per cent of the office rental market, its prevalence will assuredly grow over time, most likely as parallel options within otherwise conventionally leased office buildings. This presents exciting opportunities for property owners, office-space users and the technology-based solutions providers alike, as future business models place more emphasis of freedom and flexibility than ever before.