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Office occupiers told to expect higher fit out and servicing costs globally

Savills analysis of Q1 22 Prime Office Costs (SPOC) in global markets around the world has shown that higher fit-out costs, reflecting material and labour cost inflation, are beginning to creep through in some office markets.

While overall there has been no movement in the position of cities in the rankings since the end of 2021, says Savills, some markets are experiencing rising costs in fitting out space and increased service charges.

According to Savills this trend is most evident in Chinese cities, Kuala Lumpur, and in North American cities at the moment, but other markets across the globe are set to follow suit in the coming quarters.

Jeremy Bates, head of EMEA occupational markets at Savills, said: “From higher prices for raw materials to increasing labour costs to keep up with rising inflation, it’s likely that most office occupiers will have to pay more to rent and fit-out their space in global cities this year.

“Whilst rent is the usual indicator of increasing cost, service charge rises and higher capital expenditure will represent the largest contributions towards increased occupier costs in the coming quarters. Even in markets where landlords tend to pay for fit-outs, these costs will eventually be passed on to occupiers later in the form of higher rents. Nonetheless, for many office occupiers the expense is unlikely to deter them from selecting top quality spaces in prime central business districts to attract and retain talent, although they are carrying out extensive data gathering exercises on how employees are using space before making decisions on exactly how much to take.”

Savills says that overall headline rents have, on average, remained flat in local currencies and the increasing additional costs have yet to appear across many markets, according to the international real estate advisor, with fluctuating exchange rates due to increased uncertainty producing the appearance of declining costs for many markets in Dollar terms during the first quarter of 2022, while in local currencies they have broadly remained consistent with Q4 2021.

Read the Q1 2022 edition of Savills Prime Office Costs (SPOC)

M&A activity drives EMEA corporate real estate market to new highs

Corporate real estate sales across EMEA leapt above EUR 29 billion for the first time on record last year – buoyed by frenetic levels of merger and acquisition activity and the increasing demand for industrial and logistic portfolios.

The latest issue of JLL’s annual – ‘Raising Capital from Corporate Real Estate’ report – reveals 2021 was another bumper year for occupier sales despite the pandemic with corporates generating EUR 29.2 billion across more than 670 disposals.

It marks the third consecutive year in which the total value of corporate disposals exceeded EUR 25 billion. And it came as the sale of industrial and logistics properties raised more than office disposals for the first time.

JLL said growing volumes of capital were targeting long-term income from more specialised, ‘mission critical’ properties such as complex logistics portfolios, research and development facilities and manufacturing centres.

Corporate disposals of industrial and logistics properties raised a record EUR 11.1 billion in 2021 – well ahead of 2020’s previous record high of EUR 7.9 billion.

Notable transactions in 2021 included UK supermarket chain Asda’s EUR 2 billion sale of its distribution network to Blackstone. And in July, In July, real estate investor Hines acquired 11 logistics properties from French retail group Auchan for EUR 286 million.

Nick Compton, Head of Corporate Capital Markets EMEA commented: “Corporates continue to monetise a wide range of property assets, with another record year for sale and leasebacks in 2021 despite the headwinds from the pandemic and the economic uncertainty.

“The growing volumes of capital targeting specialised properties has opened up further routes to monetisation for owner occupiers, with supermarkets looking to raise income from their stores and supply chains, and firms in sectors like energy, life sciences and technology reviewing their asset portfolios.”

Matthew Richards, Capital Markets CEO, EMEA, JLL, added: “We expect another strong year for sale and leasebacks in 2022, with investors taking an increasingly sophisticated approach to transactions – looking beyond corporate credit profiles, focusing on defensive industry sectors and asset criticality as well as the wider context that may impact the value of individual properties.

“Expect to see more capital deployed in sectors such as complex manufacturing, energy repositioning, grocery and non-discretionary retail as they are likely to perform well in the face of rising inflation and higher interest rates.”

Meeting sustainability goals

JLL said that as the market moves into 2022, corporate owner occupiers and potential investors, are being increasingly driven by ESG factors and the adoption of post-Covid hybrid working patterns. The report remarks that corporates are looking to divest older offices that are often too big for their occupational needs, and too energy inefficient to support their sustainability goals.

Firms are also rethinking the types of space they need in light of the pandemic and reviewing where their offices should be located to support employee aspirations about flexible working patterns. An increasing number of corporates are also partnering with investors to forward fund new state of the art facilities to better meet their environmental ambitions.

Mark Caskey, Work Dynamics CEO EMEA, JLL, said: “Without doubt, 2022 is the year where corporates will have to act on ESG and net zero targets. An increased focus on sustainability and the adoption of hybrid working patterns is driving occupiers to divest older office buildings that are too energy inefficient or big for their needs.

“Corporates are working with investors to fund new state-or the art facilities that better meet their business and environmental ambitions – as well as the evolving needs and aspirations of their staff.”

Office sales totalled EUR 8.4 billion in 2021, with British motorsport firm McLaren selling its global headquarters for EUR 197 million to sale and leaseback specialist Global Net Lease. Dutch bank ABN Amro sold its headquarters for EUR 765 million to Victory Group.

The UK, Germany and France continued to be the most active markets for corporate disposals in 2021, accounting for 56 per cent of the total value of transactions, up from 52 per cent in 2020. The value of disposals in the UK alone jumped to EUR 6.6 billion, almost double the volume in France.

JLL’s report notes that despite the record year for sale and leaseback deals, some corporates are deciding to purchase the freehold of their leased properties, taking advantage of some temporary weakness in office pricing. American advertising group Omnicom bought their London headquarters for EUR 523 million (£440m) in November 2021.

Global corporates ‘want flexible office space’

Two thirds of global corporates plan to increase their use of flexible co-working and collaborative space over the next three years, according to new research.

Knight Frank’s ‘Your Space’ report polled senior executives at 120 global companies which collectively employ in excess of 3.5 million people worldwide and occupy an estimated 233 million sq ft of office space, equivalent to the total amount of office space in Central London.

The reports shows global corporates intend to operate increasingly from flexible, serviced and co-working spaces, which, they says, create a more collaborative working environment and offer the freedom to expand and contract quickly according to market conditions.

The reports says that despite the proliferation of co-working and serviced office operators the majority of global corporates still occupy office space on a traditional lease model. Two thirds of companies surveyed reported that co-working, serviced and flexible office space comprise 5 per cent or less of their current office space. A small minority, less than 7 per cent, said that flexible workspace exceeds a fifth of their total workspace.

However, Knight Frank’s research reveals that the proportion of flexible space within companies’ portfolios is set to increase dramatically. Over two thirds, 69 per cent, of global corporates plan to increase their utilisation of co-working spaces, and 80 per cent expect to grow the amount of collaborative space they use over the next three years.

Furthermore, almost half (44 per cent), stated that flexible space will constitute up to a fifth of all office space in the next three years. An additional 16 per cent estimated that as much as half of their workspace globally would be flexible space within the same time period.

Over half of companies (55 per cent) identified increased flexibility as the main driver of this change, with a significant proportion (11 per cent) stating that the sense of community fostered among workers was the key benefit. A further 11 per cent stated that the greater speed to becoming operational was the primary reason for selecting co-working or serviced office space ahead of more conventional office space.

75 per cent of respondents stated that personal productivity linked to wellbeing and happiness, would increase as they shift towards a new flexible and collaborative model of occupancy that is more in keeping with today’s business structures and working styles.

Dr Lee Elliott, Global Head of Occupier Research at Knight Frank, said: “This research underlines that a decade of global economic uncertainty has reshaped how many of the world’s largest companies view workspace. Shorter business planning horizons, together with the emergence of new, more agile corporate structures has driven demand for flexible space which enables companies to react to change quickly.”

“While co-working and serviced office operators have grown rapidly over the past five years, driven largely by start-ups and the freelance economy, this is only the tip of the iceberg with latent demand from global companies set to emerge over the next three years.”

William Beardmore-Gray, Global Head of Occupier Services and Commercial Agency at Knight Frank, added: “The demand for flexibility is the single biggest threat – and opportunity – to owners of office space. The recent boom in co-working is indicative of a structural change within commercial real estate whereby companies desire space that is flexible, highly serviced and aligned within the realities of doing business in an age of disruption. Some co-working operators have capitalised on this already, but it is imperative that owners and developers react to the new reality where customer is king.”

Steve Fox

GUEST BLOG: From service providers to business enablers – The elevated position of the FM department

Steven Fox, Corporate Real Estate Solutions, Qube Global Software

Facilities managers (FMs) today have more responsibilities than ever before. The rapid development of technology available at their fingertips has triggered a transformation in the complexity of the FM departments’ role within the corporate framework. Added to this is the increasing importance placed on providing a safe, cohesive and optimised work environment to achieving business success. In the past decade or so, we’ve witnessed FMs upgrade from mere service providers to bona fide business enablers.

Yet they still do not have a seat at the boardroom table. And with FMs capability to directly influence C-suite decision-making, is now the time? The view of FM as simply a nuts and bolts necessity, rather than a strategic benefit, is perhaps to blame for this. Confusion as to where FMs sit in the business could also be to blame – who the FM reports to depends on the respective management structure; in some cases, the facilities manager will report to the HR director. Support services such as IT, HR and procurement are all there to enable the company to carry out its core function. Yet, they tend to work in silos – and don’t really acknowledge the operational importance of FM at all. By leveraging technology, FM is fast becoming indispensable to the C-suite by helping organisations move towards ever-increasing levels of efficiency.

The role of metrics in informing C-suite decision making

A strategic FM strategy can pay dividends for an organisation in more ways than one, and with property and asset management software solutions such as Qube Horizon, FMs can provide top management with relevant real-time, past and projected information to help streamline business strategy.

It is essential that FMs link their goals to the wider business by assisting in achieving corporate objectives, collaborating with other business units, and maintaining a comprehensive FM solution to benchmark and measure corporate performance. By tracking key metrics, FMs will have the means of reaffirming or assisting decisions made in the boardroom.

Below are a couple of scenarios in which FMs can provide influential data for benchmarking purposes, as well as key metrics that will give a complete overview of an organisations’ portfolio; thus providing the opportunity for the FM department to elevate their position in the organisation by informing on business decisions.

Measuring employee satisfaction

An important facet of FM is ensuring employees are happy and comfortable in their working environment. Property tech now has employee survey capabilities, which are a great way to not only increase the understanding of issues that are important to your staff, but also to deal with them in a timely manner. Say for example, employee dissatisfaction has been flagged in a specific building. The FM department has access to data that could help identify if there is anything in the built environment that could be negatively impacting the workplace. FM’s can filter their help desk data down to a specific building, then use embedded reporting gadgets to identify if there are any reoccurring issues raised by multiple employees. If reoccurring issues were identified and related to temperature for example, further analysis could be performed just on HVAC assets in the property. Asset performance and operating costs can be compared with other HVAC assets of similar type or make in the portfolio, and deduce if any asset is performing outside of normal trend. Corrective maintenance, asset replacement or even the changing of an underperforming contractor can then be initiated depending on the underlying issue identified. Not only can the FM deal with the problem in real-time, they can also use collated data to pre-empt any other issues before they occur and rectify before they’re escalated to senior staff. Quick, evidence based changes can be made that directly improve the work environment, meeting corporate objectives of maintaining an effective workspace for its employees.

Group-wide cost saving

In addition to optimising the work environment, FMs have a key role to play in maximising assets and establishing cost-effective working processes. For instance, building and leasing decisions are traditionally the remit of the property manager through consultation with the business and its current and projected requirements. However, FM’s can also play an important role here. When deciding to renew or terminate an expiring lease, FM’s have a large volume of data that could help inform upon the best course of action. On a basic level, this can include an overview of utility bills and energy performance, but also more in-depth analysis of space utilisation levels or details of imminent end of life asset’s and the estimated costs of their replacement. All of this paints a picture, on whether renewing the lease and maintaining the property are higher than the costs of moving to a modern building on the market, the FM can offer advice accordingly.

Future planning

Whether a leasing decision is imminent or not, FM’s can assist with formulating the business budget by projecting the total costs of future occupation. Prop tech software such as Horizon can create detailed expenditure forecast reports filtered by property, region, type and so on, which can also take into account projected inflationary increases year on year. These expenditure forecasts can include anticipated planned maintenance and asset replacement costs, but also provide analysis on what make of assets can be procured and maintained cheapest. The report format is easy for senior management to digest, who can factor that information in when tailoring future budgets.

Effective facilities management evidently plays a crucial role in assisting organisations in accomplishing their corporate objectives both short and long-term. Taking advantage of their unparalleled access to real-time business data and capitalising on the opportunities to demonstrate FM’s value, the sector will continue to be uplifted to a whole new level in the eyes of other industries and practitioners.