Understanding the emerging operating environment for Office : Office 3.0

Transcription

1 Understanding the emerging operating environment for Office : Office 3.0

2 The Office 1.0 commercial office asset operating paradigm until early 1990 s Value proposition? Its about Real Estate, the space, and cost OCCUPIERS Amenities 2. Secondary customer relationship Predictable Credit tenants 92% leased 1. Primary customer relationship OPERATORS LENDERS/INVESTORS

3 The industry worked fine because ALL business space was proprietary Traditional concept of Office Occupancy type Product concept 1. Meetings 2. interactions with enterprise information 3. interactions with other employees 4. processing of work 1 Proprietary Fixed, custom

4 The Internet changed how occupiers looked at work and place. Enter Office 2.0

5 Structural shift underway in demand for the traditional office space product Demand-side occupier needs shifting Supply-side lagging More flexibility On-demand access Minimize financial impact To hire / retain talent Rigid, financeable leases Credit, capital intensive transactions Big blocks of space committed to anchor tenants

6 Reduced costs Accenture has pushed the boundaries of occupancy Documenting their journey of densification <60 SFPE Work Happens. Everywhere 100 SFPE Technology has enabled continued change Workplace strategy, Collaboration Technology 120 SFPE Flexible work arrangements 155 SFPE Technology enablement 195 SFPE 235 SFPE Traditional office Hoteling Just-in-time reservations Progress with cultural change and new mindsets Increased flexibility

7 Accenture has pushed the boundaries of occupancy Goals we might see other organizations adopt 1. Leverage new technologies and workspace tools 2. Support teaming and collaborative working, face-to-face or at a distance 3. Respond to evolving expectations of the next generation of employees 4. Increase our flexibility to adapt to future business changes 5. Support a greener way of working consistent with our objectives of lowering our carbon footprint 6. Create cost savings Work Happens. Everywhere. as a high-performance business, we seek to create an ever-more effective and efficient work environment 7. To transform how and where work happens

8 Others are getting it too its simple; smaller, highly leveraged corporate portfolios and leveraging on-demand workspaces to support peak and unique requirements its great for business, great for people, and great for our carbon footprint. No one should be sitting on large underutilized portfolios! Institutional Occupier

9 The supply-side is being affected Accenture s impact on the marketplace ,000* employees X 235 SF 62,510,000 SF portfolio Rent paid to supply side $1,500,240, Summary ,000 employees X 58 SF 15,428,000 SF portfolio Rent paid to supply side $370,272, *adjusted for comparison purposes

10 Today, Office 2.0 is an inefficient, transitional environment with new players and new business models Fortune 500 Mid-Size Regionals Smallcos Variable service levels Zero-customization infrastructure Variable service levels On-demand infrastructure Streamlined, flexible agreements Serviced Office operators Streamlined, flexible agreements Virtual Office and Club operators Variable service levels Ad-hoc infrastructure Simple check-in, check-out Variable infrastructure Total flexibility webex Linking technologies

11 Conclusion #1: Densification is unlikely to reverse Fortune 500 companies dropped below 200 SFPE for the first time in 2012 hitting about 196 SFPE. There isn t another CoreNet member who isn t targeting a continuing reduction down to 120 SFPE by 2020 or 2025 that we are aware of Quote from a CoreNet research associate at a recent trade organization event SFPE # employees leased space (in square feet) % erosion %

12 Conclusion #2: Without fanfare, demand has moved to a new paradigm: PSM/PSL Traditional concept of Office Modern concept of Office : PSM/PSL Occupancy type Product concept Occupancy type Product concept 1 Proprietary Fixed, custom 1 Proprietary Fixed, custom Allocated-by-worker 2 Subscription Serviced Office Virtual Office Co-working, collaborative, 3 Membership "Clubs" 4 Public Ad-hoc, cafes, etc Client space, "shared 5 Shared infrastructure" 6 Leverageable Work-from-home

13 Conclusion #3: Increasingly ubiquitous connectivity will enable that new paradigm % High connectivity place mission-critical in executing work Good connectivity place important in executing work % 2000 Low connectivity place less important in executing work 0%

14 All data points to increasing use across the spectrum of the PSM/PSL model PSM PSL Occupancy type Product concept 1. Fortune Mid-size Regional 3. Early stage, or smallco Proprietary Fixed, custom 96% 85% 70% 80% 45% 30% 70% 45% 25% Allocated-by-worker 2% 5% 10% 10% 20% 25% 0% 0% 0% 2 Subscription Serviced Office 0% 2% 5% 1% 3% 4% 8% 8% 9% Virtual Office 0% 0% 0% 0 0% 0% 2% 4% 6% 3 Membership Co-working, collaborative, "Clubs" 0% 1% 2% 0% 2% 4% 8% 15% 20% 4 Public Ad-hoc, cafes, etc 0% 2% 3% 0% 4% 5% 4% 8% 10% 5 Shared Client space, "shared infrastructure" 2% 3% 5% 4% 6% 8% 0% 0% 0% 6 Leverageable Work-from-home 0% 2% 5% 5% 20% 24% 8% 20% 30%

15 Conclusion #4 : These forces are collaborating to erode the traditional office building market The U.S. Office Market Rising interest rates Pressure on cap rates 3000 to 5000 functionally obsolete office assets in the US *A reducing need from current 12B SF to > 10B SF results in a $1.2T loss **CoreNet Shift in Occupancy Needs 2013 *CoStar Data report, 2013

16 The Office 3.0" environment will challenge both supply-side and demand-side for the next 20 years 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% All occupier types combined (not rationalized by square footage) Customized space, longterm contracts Alternative occupancy solutions Leverageable Shared Public Membership Subscription Proprietary Demand using more non proprietary Need new policy Need a roadmap Supply will be flat-to-declining delivering only proprietary Need new strategy The support of investors and capital

17 An Industry in transition Increasing densification Increased demand for non-proprietary US office market now oversupplied Pressure on supplyside delivery model to change Valuation model challenged Office 3.0 Very high connectivity Third-place goes live Densification begins New occupancy paradigm is born PSM/PSL New players and models Profit erosion for commodity office assets Office 2.0 Good connectivity Demand used only proprietary, custom space Supply provided only proprietary, custom space Valuation model forward-based Office 1.0 Low to no connectivity

18 Advising supply and demand at the nexus of industry change ADAPTIVE OFFICE RESOURCES San Vicente Blvd. #532, Los Angeles, CA