Meeting the demands of flexibility and growth demands of tenants
Article3 min01 June 2017
Landlords have realised that in today’s turbulent business environment a co-operative approach to leasing gives them an edge over the competition. Companies are reaping the benefits.
Given the rapid pace of change within today’s business environment, what dynamic businesses crave most is flexibility. Nowhere is that flexibility more acutely needed than in the ability to trim and add staff, a requirement that is having a direct impact on office lease negotiations.
As a well as wanting to shrink and expand floor space in response to market demands, companies also want greater give and take when to comes to tenure. With traditional lease terms – previously up to 10 years – no longer aligned with uncertain trading environments, many companies now recognise the benefits of contracting for office space within shorter lease horizons.
Also having a material impact on corporate attitudes to office space are the changing workplace demographics, and the number of people working outside the bricks and mortar office environment.
First, the increased prominence of millennials in the workforce has implications for office leases, given their liking for blending work with personal time, and their comfort with mobile work.
According to a recent Colliers APAC Flexible Workspace Report the growing likelihood of millennials being “contingent” workers (short-term hires) is driving the need for fully furnished workspaces being leased on a project basis. That’s especially true in flexible workspace hotspots like Sydney and Melbourne.
Impact of the gig economy
Meanwhile, the gig-economy is transforming the traditional job market. A survey called Freelancing in Australia suggests that about 30 per cent of the workforce – 3.7 million Australians – is now freelancing, and the numbers are expected to soar by 2025.
When responding to the growth demands of tenants, landlords are mindful of the market’s dependence on small business for job creation. For example, according to the Department of Industry, Innovation and Science, over the last eleven years all of the 1.6 million net new jobs in Australia were created by small, young companies under two years old. While large, older companies created more jobs overall, they also shed an equal amount in the attempt to remain competitive.
With all these new dynamics in play, commercial landlords are getting better at meeting tenants’ demands to either scale up or to downsize as finances or market opportunities dictate.
In response to the shorter term leases and flexibility demanded by smaller (and some bigger) tenants, there’s been a rapid uptake of space by flexible workspace operators, especially in Sydney.
For example, the entry of US shared workspace provider WeWork into the Australian market has led to the opening of the largest single flexible workspace facility in Sydney (covering 8,000 square metres at 100 Harris Street, Pyrmont), along with two sites in the CBD – 3,335 square metres at 5 Martin Place and 4,000 square metres at 333 George Street.
Established operator Regus opened two new sites in the CBD at 20 Martin Place and 53 Martin Place, and renewed several of their leases, including Darling Park and 95 Pitt Street, bringing their total leased portfolio in the CBD to over 15,000 square metres. Stone & Chalk and Gravity also doubled their footprints to 2,500 square metres and 1,800 square metres respectively.
Meanwhile, office heavyweight Dexus recently added to its own specialised offering in the flexibility market – By opening Dexus Place and by partnering with US incubator RocketSpace to open a 4,645 square metre facility in Melbourne specifically for IT start-ups. There are additional sites in Brisbane and Sydney mooted for 2017.
WeWork is expected to keep expanding its Australian operation, and other big property investment companies likely to take a closer interest in the shorter end of the lease market include AMP Capital and GPT’s Space&Co.
It is not unusual for today’s leases to include break options on an entire floor, certain portions of space, or even the entire lease
Rationalising space requirements
Users of flexible workspace have traditionally been freelancers, small business owners and entrepreneurs. However, Rowan Humphreys at Colliers International is witnessing a growing number of larger corporations looking for overflow space or using flexible workspace to rationalise their own space requirements.
Companies at the bigger end of town are still committing to longer leases. However Dexus Head of Office Leasing Chris Hynes is also witnessing a trend for companies to negotiate options that allow growing [or shrinking] footprints in the building, within the tenure of the lease. “Until now, the only other choice was to sub lease, which has mixed blessings,” he says.
By comparison, he says it is not unusual for today’s leases to include break options on an entire floor, certain portions of space, or even the entire lease. But because flexibility can come at a price, he urges companies to fully understand their requirements before entering into any lease contract.
In light of rapidly rising real estate costs, especially in Sydney where supply remains tight, Humphreys says larger companies are also consciously targeting buildings with co-working and shared facilities within their overall footprint.
Instead of over-committing to floor space they don’t need long-term, Chris Hynes says companies will also look for buildings which can pick up an overflow. For example, a solution could be ideal to house a project team for only 12 months.
“Given that Australia’s co-working market only represents 2 per cent of total office space – less than half other markets globally – there’s clearly significant room for growth, and some companies will see it as part of a permanent solution,” he comments.