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Tuesday, July 18, 2017

Seismic structural shift in the office market isn't coming, it's here...

By Rand Stephens (Houston) recently posted a very interesting article about a shift in how companies want to use office space and the impact that may have on the asset class.

I believe this article is spot on from what we’re seeing in the marketplace. However, the Seismic shift isn’t about to happen… it’s happening as I post this blog.

The phenomenon that’s occurring is that more and more large corporations want short lease terms (less than 5 years) to provide themselves flexibility in an ever changing business environment. In the past, the cultural need for private dedicated offices for employees required sizable investment in tenant finish by landlords which in turn created the need for a long lease term in order for the landlord to amortize that cost. That culture has changed due to constantly improving technology which allows people to work anywhere anytime. Consequently, employees are willing to give up their private office in exchange for improved lifestyles with less commute times and improved family time, or “me time”.

That’s a big cultural shift, and corporations are willing to accommodate their employees if it also improves their bottom-line; and, that has been happening by corporations being able to use significantly less square footage per employee. Now big companies are also seeing value in short lease terms because they potentially rid themselves of the huge cost of carrying unused space.

Companies like LiquidSpace, WeWork and TechSpace have arisen overnight in a new real estate service line to satisfy corporate America’s rapidly growing desire for flexibility (read the article to learn more).

For smart landlords who work with this new service line, this shift to short lease terms will create opportunity. In addition to the benefits discussed in the article, a bigger benefit will be improved cash flow since landlords won’t have to incur huge tenant finish costs. The tenant’s workplace design will be done with furniture to create private areas, public areas and collaborative areas and the landlord will have to provide a simple open floor plan reducing the need for the high cost of tenant finish which currently eats up the investors’ cash flow.

Special thanks to Amy Erixon, Principal and Managing Director of Avison Young Investments, who tuned me onto this article and keeps our company up to date on breaking technological trends. Be sure to read her most recent white paper, Architecture of the Fourth Industrial Revolution: Distributed Networks and Artificial Intelligence – Impacts and Opportunities for the Real Estate Sector.

(Rand Stephens is Managing Director of Avison Young's Houston Office.)

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