THE MODERN OCCUPANCY PARADIGM A Point of View THE … · Our team is made up of people with deep industry experience in commercial real estate asset ownership and operations, occupier

Confidential & Proprietary Adaptive Office Resources 1

THE MODERN OCCUPANCY PARADIGM – A Point of View

Corporate infrastructure moving into the Cloud, smartphones, other mobile devices and increasingly

ubiquitous connectivity is un-tethering the modern-day workforce from “place”. This catalyst is effecting

structural, disruptive change with the real estate demand-side (employer/occupiers, and their employees)

and will profoundly affect the supply-side (capital, asset owners, operators) bringing about the most

significant changes the commercial office real estate industry has ever experienced.

The Wired-In Workforce

Today’s workforce is increasingly unplugged yet wired-in. We are all witness to a grand redefinition of human interconnectivity playing out right before our eyes.

In the US, 90% of all American adults own a cellphone, with 64% owning a smartphone and

42% owning a tablet. Internet Project Survey. (2014, January 14). Retrieved November 6, 2015.

This is more than just “tech tools” in people’s hands; mobile and cloud-based technology is playing a key role in dis-“placing” work processes for every kind of business. Cloud Computing: United

States Businesses Will Spend $13 Billion on It. (2014, January 29). Forbes.

THE MODERN OCCUPANCY PARADIGM | A Point of View

By Jeffrey V. Langdon and Dion FowlerOriginally published on IREI.com Q2 2015

Updated as of November 8, 2015



The Traditional Occupancy Paradigm

The ultimate impact of these technologies on our everyday lives remains to be seen, however, it is already disrupting the way companies and their employees actually produce work. Furthermore, there is little doubt this will be a major factor in changing the role of term occupancy in platforming business operations for companies of all shapes and sizes.

Through the early parts of the new century, any type of alternative to traditional term occupancy in use by the average business was relatively insignificant. Regus and OBC Reports (2013 -2014)

Regardless of company size and type, it was necessary that all knowledge work be physically performed in a proprietary workspace environment that was either leased or purchased by a company to warehouse both employees and company data/information.

Since employees needed to interact with data in close proximity in order to produce work, this pre-internet, pre-digital, pre-mobile model survived relatively unchanged for over 75 years and its basic tenets still underpin the investment and operating fundamentals of the traditional office space supply-side.

This supply-side industry paradigm of provisioning self-contained spaces with fixed lease agreements and capital intensive, heavily customized workspaces in the pre-internet era worked well for all parties-but is increasingly coming into question as work processes have moved into the Cloud, and to a new generation of workers who value flexibility above other attributes of their relationship with their employer.

Demand-Side Change: A Multi-Modality Framework Inspires a New “Occupancy Portfolio”

Valuable insight can be derived by examining the occupier’s (and, by extension, their employees) evolving relationship with place and its changing role in supporting business operation.

THE TRADITIONAL OCCUPANCY PARADIGM THROUGH THE 2000’S

WAS STILL SINGULARLY ABOUT “TERM OCCUPANCY” IN BLUE



Today’s unprecedented virtual access to enterprise information and easy ability to be productive from outside of a traditional office space firmly establishes that work is truly “something we do” and increasingly not “somewhere we go”.

Over the last few years, national office vacancy rates hovered around 17%, compared to roughly 12% at the end of 2007. Although this might be cyclical, it could also represent the beginning of structural change where the importance of the role traditional office space plays in support of business operation is shifting.

More companies every day are redefining their occupancy strategy and policy using six

alternative modalities (including the traditional mainstay of term occupancy), that are

increasingly viable in a wired world:

1. Subscription (proprietary, non-custom, short term, dedicated location)2. Membership (shared environment, as-built infrastructure, multiple locations)3. Public (non-reservation, pay-as-you-go, on-demand spaces)4. Shared (agreement enabled use of the premises of others)5. Leverage-able (private infrastructure that can be co-opted, e.g. work-at-home)

Adoption by the demand-side of these extended occupancy modalities is rising and not likely to slow down as technology enablement, culture and generational turnover will continue to drive the growth and use of non-term occupancy solutions to support business operation. 2015 CMBS

Outlook About Property Fundamentals (January 7, 2015) CoStar

Understanding the Modern Occupancy Paradigm

Smart occupiers from a variety of vertical industries are developing new operating strategy and don’t want to find themselves employing 20th century business practices in a 21st century world. They are thinking in new, innovative ways about how they house and support their workforce to produce work.

A SHIFTING FRAMEWORK: THE 6 MODALITIES OF OCCUPANCY (2010’S)



This is our working definition for the Modern Occupancy Paradigm:

Occupancy strategy based on the MOP will more effectively platform an increasingly mobile workforce and help companies operate with as close to a right-sized occupancy portfolio as possible, while minimizing the organization’s environmental impact and footprint. In addition, use of multiple modalities will help minimize operational cost leakage and maximize efficiency.

An example of one company’s approach to the MOP is Accenture. Accenture is focused on providing an evolving portfolio of supporting infrastructure options to their workforce:

Workplace Blueprint (2015) Accenture www.accenture.com

“The Modern Occupancy Paradigm (MOP) is demand-side occupancy strategy and policy that is built around employing some, more, or all of these increasingly viable modalities to house employees with the objective of optimizing a business’s operational infrastructure”



Importantly, our research points toward a future where demand-side usage change significantly redefines the supply-side environment:

GPT: The business of workplace transformation (2014) GPT Companies

Demand-side approach to the MOP will also vary significantly by company size, stage of growth, industry, culture, financial objectives and planning horizons. The following table provides insight into how a variety of occupiers might approach establishing their occupancy portfolios:

Implications for the Demand-Siders

Today, mobile and cloud-based information sharing and storage is not a choice, it’s a necessity, and this has forced employers to operationalize better support for an increasingly un-tethered workforce.

The average employee now enjoys unprecedented mobility, able to connect and communicate at will. Rising competition for talent is also well-documented. It has been demonstrated time



and again that increases in employee satisfaction and productivity can be directly linked to working remotely & flexibly.

Companies that engineer their own version of the MOP and operationalize some or more these modalities will deploy an occupancy environment where employees have more choice-and this can provide them with an important edge in attracting and retaining talent.

Moreover, reducing a company’s square footage per employee (SFPE) through a strategy that includes less use of term occupancy could result in a lower fixed real estate operational run rate. This might provide them with valuable cost advantage when compared to their peer group.

The increased profit margins from avoiding long-term, costly and largely underutilized leased space provides enough of an incentive for occupiers to embrace this nascent paradigm with enthusiasm. A remote-enabled workforce also widens the pool from which companies find their talent by lessening geographic constraints. Employees not only will save time and money on commutes, they can also alter their hours to suit their life-style. It’s a win-win.

Implications for the Supply-Siders

Commercial real estate supply-side industry professionals must acknowledge these new ways of working and the behavioral norms that come with it, and redesign their business models so their office space products remain relevant, and are able to satisfy the shifting needs of the occupier.

Co-working, collaborative workspace, serviced offices, touchdown facilities, on-demand spaces, infrastructure supplementation, and infrastructure replacement are just a few of the terms that are becoming part of the new office language. This is evolving faster than office space providers can understand, yet understand they must.

A few commercial office real estate owners are working hard to reinvent their core business approach and focus. They are in the early stages of developing new products and services their occupiers will value. These owners are working to change their value proposition and how they engage with customers. They are investing in R&D, and aspiring to have an entirely different conversation with the customer than was previously possible. These operators have the best chance to thrive and prosper, and remaining commercially relevant will be a natural byproduct of their hard work.

Those slow to engage with this new reality will be left behind – challenged to deliver the yields routinely possible in the past.

Eyes to the Future

Over the next 10+ years, the commercial real estate industry will go through significant realignment. The catalyst will be the changing needs of the end-user of the industry’s products and services that shall ultimately determine how the supply-side should respond.

No one will be spared, as the entire commercial real estate eco-system will be affected; capital, lenders, investors, owners/operators and end-user occupiers, and of course, the third-party services provider apparatus.



For the first time in over a handful of decades, the commercial real estate industry will be entering a brave new world in which the intrepid and resourceful--both demand-side and supply-side--will find significant opportunities to innovate and prosper. Those slow to reimagine themselves in this world and those who perpetuate “business as usual” will be the greatest gamblers of all, and incur the greatest risks in this emergent, inevitable environment.

___________________________________________________________________________

AOR is the world’s premier commercial real estate strategy advisory and consulting firm. We focus exclusively on the commercial real estate industry, and we help both owners and occupiers understand the nuances of this “Modern Occupancy Paradigm”. We work with them to design, build, and operate strong businesses that deliver sustained value to their customers and shareholder, along with measurable growth.

We do this by helping our clients find strategic insight through a robust understanding of their current and future customer priorities, commercial office industry trends & innovations, and the competitive horizon. Our team is made up of people with deep industry experience in commercial real estate asset ownership and operations, occupier advisory and brokerage services, and business strategy consulting.

To learn more about Adaptive Office Resources, our capabilities, and how we can help you, visit www.adaptiveofficeresources.com or contact:

Jeffrey Langdon, Managing Director Adaptive Office Resources Tel: 213-447-5016 Email: [email protected]

http://www.adaptiveofficeresources.com/

mailto:[email protected]

Documents

THE MODERN OCCUPANCY PARADIGM A Point of View THE … · Our team is made up of people with deep industry experience in commercial real estate asset ownership and operations, occupier