Source: CBRE Global Research
Unpredictable economic growth or contraction, shorter business cycles and rapid advances in technology require companies in Asia Pacific adapt to sudden changes in business conditions more quickly than ever before.
Nowhere is this trend more apparent than in corporate real estate, where occupiers are transforming their approach to real estate decision-making, enabling them to rapidly increase or decrease their office footprint on demand.
While conventional long-term leases remain the norm, companies are increasingly assembling office portfolios by picking and choosing options from a broad range of formats such as incubators, coworking, serviced offices and turnkey solutions.
However, conducting cost analyses of traditional leases versus flexible space and identifying the option that makes the best financial sense can be problematical.
This is because of the many variables involved, such as different pricing structures and the impact of headcount volatility.
These considerations pose a headache for occupiers seeking to precisely gauge the true cost of the different types of office space as they aim to build greater resilience into their portfolios.
This ViewPoint by CBRE explains the ongoing evolution of occupier space requirements and identifies the challenges – and potential solutions – involved in evaluating the financial suitability of the various types of office space.
The Broadening of space solutions
Corporate real estate occupiers in Asia Pacific are complementing core portfolios by accelerating their use of flexible space as they look to ensure flexibility of contract term (i.e. lease length), reduce up-front costs, or evaluate new markets.
These core and flexible elements are being integrated at both the asset and portfolio level into what CBRE refers to as “Core x Flexi” strategy.1 “Core” components comprise traditional office leases, which require little explanation.
The “Flexi” element refers to the use of flexible space, a relatively new term that CBRE defines as office space that solves uncertain, transient or short-term space requirements.
More recently, it has become a catch-all phrase to encompass any office space leased for a short period of time, whether on a desk-by-desk basis or on a larger scale.
The spectrum of flexible space solutions is expansive, with different types of space catering to a range of occupier types and functions for different purposes.
Flexible space can range from traditional serviced offices to relatively newer formats such as incubators, accelerators and turnkey solutions.
Also falling into the category is coworking, which can be operated by mainstream landlords or third-party providers and is undoubtedly attracting the strongest occupier demand.
Evaluating traditional and flexible options
While a broad range of factors should be considered when evaluating the suitability of different office space solutions, such as location, fit-out quality and security, along with the impact on company image and organisational culture, cost remains at the forefront of the occupier agenda.
However, any accurate measurement of the true occupational cost of traditional and flexible space must consider several variables.
Traditional leases are priced on a per sq. ft. basis and may be subject to a facility management and service charge.
Tenant incentives such as rent-free periods and abatements, fit-out allowances and different occupational densities must also be factored in.
Flexible spaces such as coworking charge on a per desk or membership basis and may require additional payment for amenities such as meeting rooms and F&B facilities.
Occupiers may also be required to pay a premium to customise their space into a bespoke solution or build expansion and contraction options into contracts.
Other flexible options may include turnkey solutions, whereby a tenant engages a third-party provider to lease space on its own book and fit it out according to the tenant’s specific requirements.
This approach requires the tenant pay the third-party provider a monthly charge based on the cost of the rent, fitout and facility management, in addition to a profit margin.
While the rent for a flexible space may be more expensive on a per sq. ft. basis than a similar sized office space rented on a traditional lease, the total cost of occupation under the latter may be higher due to the initial fit-out cost.
Alternatively, were an occupier able to secure high incentives, rent-free periods and a sizable fit-out allowance, committing to a traditional lease may be more financially beneficial than licensing desks or purchasing memberships in a coworking centre.
Determining the true cost of real estate
Many large occupiers seeking greater flexibility are struggling to accurately assess the true cost of flexible space versus traditional leases.
Those companies who are performing assessments are still relying upon antiquated and time-consuming methods such as manually inputting raw data into excel spreadsheets.
To simplify this process, CBRE has developed CALC, CBRE Agile Lease Calculator, a free web-based platform (https://calc.cbre.com/) designed to compare the cost of a flexible lease to a traditional lease according to various growth scenarios.
CALC addresses the two key challenges in comparing these lease types: These are the different pricing structures between the two models (per sq. ft. per year versus per seat per month along with different inclusions or exclusions) and the impact of headcount volatility (degree of certainty for growth).
Also read: coworking space boom in Thailand
CBRE pre-populates CALC with data for major global markets to create a starting baseline for analysis.
Traditional lease data is sourced from CBRE databases and reports, while flexible space data is obtained by reviewing a range of provider costs in the market. Users can also customise their analysis with their own data.
Given the uncertain economic environment, any assessment of the cost of office leases must consider future headcount growth.
When the user is uncertain on headcount, CALC can show them potential costs based on the potential fluctuation from expected headcount growth.
When the growth rate is unpredictable, and users have greater exposure to risk, CALC factors this into its average cost.
CALC then generates an interactive report providing occupiers with a financial comparison highlighting the break-even year and identifying the precise moment when a traditional lease becomes more cost-effective than a flexible lease.
This information can be used to build business cases and identify growth and risk scenarios across various lease terms to understand the true cost of real estate over time.
The flexible revolution continues
As multinationals seek to build more flexibility into their office portfolios, more companies will increase their use of flexible spaces, a trend that CBRE has found to be even more prominent among occupiers with portfolio reduction plans.
Corporate real estate occupiers evaluating portfolio strategy and considering a broad spectrum of office solutions are advised to utilise agile lease calculators to precisely determine the financial suitability of traditional versus flexible spaces.
CBRE is also developing efficiency platforms including workplace strategy questionnaire called Spacer and a fitout cost guide tool for project management.
Tools such as these can play an invaluable role in guiding small and medium-sized firms through all aspects of their next office space.
Agile space calculators may also eventually be used to help landlords accurately assess how much space in their properties should be allocated to traditional occupiers and flexible space operators and the likely effect on capital values and rent.