What you need to know about Leasing - Top 10

I was recently asked by Industry Thought Leader & teacher, Antony Slumbers to contribute a top 10 “What you need to know about Leasing” list for his newly minted (and prolific!) Trillion Dollar Hashtag course.?

So first, the short story:

• Guiding workplace leaders is harder than ever - levels of indecision and uncertainty remain high. So it’s no surprise companies are shying away from space commitments.
• Vertical community - buildings which truly link up the floors and beyond. These will unlock the real opportunities to secure long term leases in the future.
• Traditional leasing on life support - despite a lot of the CRE establishment talking about cycles and a ‘flight to quality’, there has been a step change in demand. The pre-Covid status quo isn’t coming back.
• Risk of toxic culture - there’s no point in designing and delivering expensive space if people are put off from using it by bad behaviour.
• Demand for Space-as-a-Service is far greater than traditional space - the evidence is already here to show what companies want.
• Full stack buildings and the ‘liberated’ office (Work Near Home + ‘office urbanism’). Corporate offices have historically been focussed in large urban centres and this has driven long distance commuting. Drog Poleg memorably said “it’s not the office, it’s the commute”. The future is in large part about bringing work (the office) to people, not people to work (HQ).
• In depth understanding of SpaaS is required to win in this market - it’s not just the old building model which needs to change. A whole change in skillset is required for the office industry to match its supply with the newfound needs, wants and desires of the demand side.
• Choice is key - there is no office ‘amenity’ more valuable than the choice to go there or not…

But now let’s dive into the detail:

Here’s #10:

Guiding/stewarding workplace leaders has never been harder, as the mentality/vested interests of many in the C Suite remains the same.

So what do I mean by this? In simple terms, many C-Level executives are seeking to return to 2019 for reasons such as:?

long-term trailing lease obligations with massive capital spent on improvements

• the belief that culture is on ‘life support’ because of not being in the office
• the belief that innovation/collaboration is suffering
• large investments in the CRE sector
• internal pressure from top performers/managers to get people back (this is often because these folks are used to the power the office has granted them and/or need to justify themselves), and much more.

Conversely however, most workplace experience/sustainability leaders within large orgs have fully moved on from 2019 and are seeing this inflection point as an opportunity to:?

• Shed immeasurable amounts of redundant office space
• Reposition corporate HQ as a downsized venue rather than an office in the traditional sense?
• Explore partnerships with flex office operators/marketplaces in an effort to bring the office to employees rather than forcing them to commute to it as well as undertaking this approach to obtain new data that will inform future office location strategies
• Lean into ESG objectives, shed the notion that culture = ‘9-5’ at HQ, and much more.

The issue here is that these stakeholders are often at odds. One is attempting to return to the past and mitigate the necessary capital outlays leaning into the future would require; whereas the other is seeking to steer the ‘Titanic’ away from the iceberg by empowering employees to work where they are happiest/productive, and to make investments now that will pay dividends down the road.?

Unfortunately in all too many cases one is the boss and one is the employee, so we all know how that goes.

This is where a job like mine gets very complex, as often I am working with the workplace leader, not the CEO. People like me have to help workplace leaders achieve savings on their real estate today by downsizing wherever possible (a tall order!) and build business cases to make capital investments for the future, today. There’s likely never been a more dynamic time to be an office leasing advisor and one of the most challenging aspects of the times we are in is that the right advice doesn’t necessarily get us paid.

#9

For office densification to maintain its place, vertical community will have to be considered like never before.

What do I mean by this?

In so many ways the Post-Industrialized world has thrown out Dunbar’s Law and in turn, has thrown out what it means to exist within a community. While densification was/is a necessity of urbanization, it still remains unnatural to live/work in such big buildings and work for such large organizations. Covid has re-attuned our “spidey senses” to these facts.?

This is why, in cities like San Francisco (unique issues like homelessness aside), we see neighbourhoods bumping with people, while the downtown remains desolate. And this is why concepts like Work-From-Pub (courtesy of John Hopkins, PhD ) are taking off.?

People care far more about being in and connected to their communities than they do about the latest shiny glass box in their local post-Industrial Age Financial District. And it doesn’t take a rocket scientist to decode the only reason more are showing up on a regular basis - forced attendance. Because unlike our homes, cafes, coworking spaces, local restaurants, community centres, parks, etc. these environments are often unnatural.?

This is why vertical community must be considered like never before within tall office towers. And in my view this doesn’t mean the best indie food stall, gym, or patio. It means purposefully designed spaces of course, but ones that drive community within and beyond the building. The key word in this equation is HUMAN (activated). Far too many in the office world are still fixated on how a space looks (these are just features), not how it behaves (how people engage with one another).?

A few great examples of community driven spaces (certainly NOT an exhaustive list) are:

OneEleven in Toronto?

The Park at Ivanhoé Cambridge ’s CIBC Square in Toronto?(shout out Jonathan Pearce , Charlie Musgrave and the extended Ivanhoe/ 汉斯 teams for having the foresight to include such a critical amenity to its customers and the broader city of Toronto at large)

XCHG Spaces at AXA Investment Managers 22 Bishops Gate in London (operated by NewFlex )

Well& at The Durst Organization 's One World Trade + 151 West 42nd Street (operated by Convene - shout outs to legends Ryan Simonetti , Elliott Sparsis and the broader team)

We all know cities aren’t going anywhere, and within them density is an inevitability; but while people may need to live in a tall building, Covid has proved that they don’t need to work from one. So in the game of competing for people to commute to the office, having vertical community is table stakes and nailing it wins the day.

#8

Today: traditional, medium/long term office leasing is on life support, and the office industry has an illusion of more value than in fact exists. Tomorrow: people will be more productive than ever before because we'll book offices on-demand, and the office industry will be more valuable than ever.

What do I mean by this?

In 1989, the first global flexible workspace company was founded, Regus. It focused on selling executive offices in a format called the “business centre”. Kinda boring, but it did what landlords couldn’t, sell to individuals/SMEs and give them what landlords couldn’t, a fully serviced offering.?

In 2010, the first “cool” global flexible workspace company was founded, WeWork . As many of us know, it was fraught with challenge under its original founder but it did 4 things very well:

1. Created the first consumer facing brand in the office sector.?
2. Established the importance of driving community (if we can work anywhere, why work somewhere…?).?
3. Started to make more large enterprises aware of the need for a variable cost structure.?
4. Exposed the fact that office buildings are riskier than we all thought because soon the average customer of the office would seek lease flexibility + additional services from the landlord in one way or another.?

Then, in 2020, a global pandemic happened and massively accelerated the adoption of remote work (notably within the Tech Industry, the darling of office demand).?

So does any of this sound familiar?

Blockbuster was on life support as of August 29, 1997 (the day Netflix was born), but it wasn’t until 2007, when Netflix started streaming, that this became clear. Today more people watch movies than ever before because we can access movies on-demand. What is the value of the entertainment industry?

Record stores were on life support as of 2001 (when Napster was born), but it wasn’t until March 2011, when Spotify announced 1 million subscribers, that this became clear. Today more people listen to music than ever before, because we can access music on-demand. What is the value of the music industry?

Print photography went on life support in 1975, when Kodak engineer Steve Sasson built the first digital camera prototype; but it wasn’t until the mid-to-late 90’s, when LOTS of people owned a digital camera, that this became clear. Today more photos are taken daily than ever before, because we can take pictures on-demand. What about the value of the camera industry? (or just $AAPL)

Traditional, medium/long term office leasing IS on life support…soon it will become clear. Tomorrow, people will be more productive than ever before, because we'll book offices on-demand. What will the value of the office industry be??

You know my answer…

What’s yours?

#7

Beyond the cost, Covid has exposed that the greatest go-forward risk to the HQ office is toxic culture.

What do I mean by this?

In many ways the pandemic has been a very individual experience, but in others it’s very much been a shared one. One where the curtain has been lifted, and we’ve seen things in our lives for what they truly are. And corporate culture has by no means been “immune”. Interrupting the pattern of our daily commute for such a long stretch got us to see that:?

• we all of a sudden had more space (how ironic…) to express ourselves;
• we could at least ensure that the many thinly veiled threats masked as support were experienced through a screen
• we could avoid talking to those who bullied us at the office
• we didn’t have to overhear yet another mean (or worse than mean) comment being made at the expense of someone who didn’t deserve it
• we didn’t have to deal with “power plays” in the same way

And so on…

In short, many aspects of the hierarchy, or perhaps patriarchy, of office culture went away, allowing a reprieve for so many among us. And as many are now being forced to go back to the office on a fixed schedule, without much explanation other than “culture”, we will have a before & after picture in our minds. I acknowledge that remote undoubtedly has its cultural challenges too, but that is not the subject of this post.

How many companies’ cultures will have adapted to be representative of the changed people that walk the halls of their organization? My view is that the number is simply so inconsequential that it poses an existential threat to the office on the whole. Predictions around reduction in demand for traditional office space range anywhere from 10 to 40% of pre-pandemic levels (I’m betting on the upper end of the range). And while there are economic factors and productivity factors that contribute to these assumptions, there are also social factors.

So how much of this potential reduction is toxic culture? I’m not smart enough, nor do I have data to know for sure, but my gut tells me it’s meaningful. And over time, the biggest loser of any shortfall won’t be employees, it’ll be those with a vested interest in demand for office returning to 2019 levels.?

So shouldn’t those who want 2019 back be canvassing on the basis of new and better office culture? Because to me, solving this Rubik’s Cube seems a wee bit more important than who has the best pizza Friday (gotta do something to boost attendance on Friday, right?!) or which building has the best newest amenity worth commuting to experience.

What do you think?

#6?

There exists a bifurcation in demand for traditionally leased offices vs. SPaaS and the implications stand to be far greater than a simple migration of inventory (30%+).

What do I mean by this?

One of my core beliefs is that eventually the “average” company will fit the ethos of what we define as a “Tech” company today (I don’t mean FAANG when I say this, I mean today’s SME’s) and if this is true then we should we readdressing how office supply is offered ASAP.?

They want to buy on-demand: global access memberships; access to marketplaces; meeting space by the hour/day/week; short-term suites; and they want the provider to move as quickly as booking a dinner reservation (we are moving in the direction of deposit-less, same day access).?

They want transparency & insights: a (simple) transparent agreement; pay what space costs (NO time for lengthy negotiations); and the supplier (coupled with their advisors) has to be able to explain how space is being utilized and more notably how this data should be informing future buying behaviours.?

They want a service/hospitality partner. Competing for talent is getting harder and harder and competing for in-person collaboration is too. Companies need office space suppliers who are in the human experience business. To quote one of my favourite office landlords, Basil Demeroutis : “The objective of an office building is to create authentic connection between not only people and place, but people and people, so that their experience in my building helps them get to a more fulfilling, fully actualized place in their lives.? That’s not done by adding a coffee bar or yoga studio.”

The alternative to not achieving this and more from an office equals staying remote, which they are fine with, but is the office industry?

And even when taking aside these finer details, office demand is bi-furcating in front of our eyes. Demand for flex is V curving its way out of the pandemic while demand for traditional space depicts an irregular curve at best (see Flex graph by my buddy Ben Wright vs. Traditional). CBRE Toronto completed 164 office leases with Tech Sector clients between 2017-2019 but only 74 between 2020-2022…that’s a STARK drop off (longer post on subject + this one too).

And yet despite these facts, I’m hearing some landlords say they won’t transact with Space-as-a-Service operators unless they take a net lease and put up ALL the capital to fit out the space. In some cases this will impact retention, in others it will be a nail in the coffin.?

We aren’t experiencing anything that resembles previous recessions, we are experiencing an obscure moment, as if the masses all bought the first version of the iPhone (remote work); and it has both accelerated existing trends, plus 180 degree turns. So, to go back to my original statement, what is occurring has far greater implications than a simple migration of supply from fixed to flex.

#5

The next investable horizon will see the ‘full stack’ building and work near home become commonplace. The one after that stands to birth the ‘liberated’ office.

What do I mean by this?

To date, the office industry has had the benefit of building a business on the “if you build it, they will come” mentality while the rest of the marketplace has had to adopt a “build, measure, learn” approach to their business models to stay in business.?

Gone are the days of chucking space at customers, at a minimum landlords must form partnerships with best in-class flex space operators but eventually they’ll either have to expand those partnerships or create for themselves, the ‘full stack’ building. As good friend and SpaaS legend, Caleb Parker says: "Extending the experience that is usually locked within the flexible office footprint and casting a customer service net across the entire asset as a fully connected experience".

Here’s what that looks like:?

• Management - think active, hands on management, like a world class hotel?
• Hospitality - think human centric, like a world class hotel?
• Community - programming that attracts people who share a common ethos and drives authentic connection between them within and beyond the building (not how the building looks, but how it behaves)
• Technology - seamless ability to purchase, use and experience the building?
• Space - (ACTIVATED by humans, not ghost towns of beautiful space with no service) - lobby activations (cafes/bars), conference/meeting facilities, furnished/serviced floors/partial floors available on flexible terms, hot desking/coworking, amenities, + whatever traditionally leased footprint makes sense for an anchor tenant?

And the key to this ‘full stack’ is that it must be LED by customer needs; engaging each customer persona in the build, measure, learn process is what it’s all about! I see this coming to life for the office sector along the next investible horizon and it won’t surprise me if new investor profiles are required to make it happen.???

Then there is Work Near Home which is so obvious. Companies can downsize their HQ spaces dramatically while turning them into venues (see ??), reduce their environmental impact (less office space, less building out office space and less commuting), and level up the productivity/quality of life of their employees.?

What comes after all of this??

The knowledge worker will become ‘liberated’ due to the emergence of ‘office urbanism’ which will bridge the gap between the private and the public realms. The office will quite literally be in our pockets.

So in short, we can look forward to the fact that the future looks NOTHING like what Jamie Dimon, David Solomon & Co. are attempting to reimpose on us!

#4

Understanding the broad strokes of Space-as-a-Service has become table stakes and knowing it in depth is what will set apart those who service the office.

What do I mean by this?

There’s probably 10 different names for the SPaaS industry and that doesn’t seem likely to change soon so I think it’s more important to understand how the industry stacks up:

1. There are many different product types (some of which are offered as a suite of products by sophisticated operators and some of which are offered stand alone): Meetings/events ( Convene ); Enterprise Flex ( WeWork , International Workplace Group plc , Industrious , Serendipity Labs , iQ Offices , Hub Australia + many others); Work Near Home ( THRIVE | Coworking , The Village Hive Coworking , DAYBASE , Swivl ) and Niche Coworking/Flex ( The Wing , OneEleven ) Club Working ( Old Bond Store ). You get the point.

2. Then there are marketplaces that sit on top to create a network effect (+ data insights) for enterprises and direct ease of access for “retail” consumers. Examples include Flexday , Upsuite , LiquidSpace , Upflex , Desana , Deskpass , hubli , Radious + many more (shout outs to friends Justin Raymond , Brando Usher , Ben Wright , Mark Gilbreath , Brett Hartle , Mike LaRosa , Michael Cockburn , Sam Rosen , Ciaran Delaney , & Amina Moreau for all your amazing work).?

3. Then it comes down to understanding the “brand” of each operator. Comparing SPaaS to hotel brands in one regard is analogous (what is the caliber of the brand?) and in another is understanding what they stand for like we do retailers (are they like Patagonia or H&M?).

Broadly speaking, that’s how I see the “broad strokes”. And to be relevant in the office industry going forward, one must understand these areas so it’s worth exploring further if this is the career path of choice.

Then there’s diving in, and understanding how:

• supply/demand data impacts buying behaviours of SPaaS operators/landlords/customers (location strategy for SPaaS operators/customers and portfolio strategy for landlords)
• to put deals together for operators (management agreements, rev share leases, market-to-market analysis, advising on space layout based on demand data, etc.)
• to bridge gaps in landlords knowledge (helping de-risk the deal process with an operator/get the deal done) + all of what is referenced in the bullet ??
• to advise companies who want to buy flex (education on total occupancy cost for SPaaS vs. traditional lease, portfolio optimization through buying flex, talent studies that enable bringing the “office” to employees not the other way around,? marketplace partnerships, etc.)

The list grows by the day in this department, and I’ve only really covered advisory services, not ESG, HR and beyond.

As you can see this is an exciting new asset class that is important to be knowledgeable about if you are playing in the realm of work"place".

#3

There is no office ‘amenity’ more valuable than the choice to go there or not.

What do I mean by this?

This statement feels intuitive/self-explanatory but I’ll provide more context. In simple terms, there are divergences of desires going on. Landlords and employers often want the same (but for different reasons) and employees want different (for obvious reasons).

Landlords want their buildings to remain full, so naturally are focused on highlighting the potential pitfalls of remote work. Many are also becoming reactive, scrambling to “amenitize” their assets in an effort to drive occupancy up (most don’t have crazy vacancy yet but low occupancy = future vacancy). Two facts remain though: most of the updates being contemplated are simply feature updates, not services/hospitality; and even the most “commutable” hospitality focused building feels equivalent to offering someone 3 nights at a Four Seasons that requires a flight to get to. It would be great to go, but often other responsibilities will stand in the way (actual work, caregiver duties, keeping the household afloat, etc.). HQ buildings must focus more on driving authentic connection points for people within and beyond. Because while appearance is important, how we behave always matters more, and office buildings are not immune from this reality (refer back to #5 for refresher).

Many employers want their people back because of a sunk cost fallacy pertaining to investments made in their office space, as well as “culture” and “innovation”. It’s understandable to want to double down on what HAS worked but the reality is they should be investing TODAY in distributed approaches to “office-ing” and Remote First approaches to culture & innovation. Leaning into all of this will undoubtedly be messy, but not doing so is denying disruption and denying disruption has never turned out well for us humans (see video).

Most employees want choice over the location they work from and flexibility over their hours. They don’t necessarily want to work from home (all the time) and they aren’t saying they don’t want to see their colleagues (sometimes), but they are looking for tangible reasons to commute and adequate notice to plan around the disruption. Intuitively they know that fixed days make no sense and they’d love to have more options, not less in terms of where they can work. And if the office industry/employers don’t start coming up with more innovative alternatives at scale, the sentiment for a LARGE chunk of the workforce is likely to be that home is the best option. Challenges aside, this approach ensures the best ability to manage other areas of their lives that were MASSIVELY neglected pre-pandemic and they can save money.

So in summary, if choice is the ultimate “amenity” then those invested in the office need to offer more of em’!

#2

The number of employees an organization has can no longer be correlated to the square footage of their offices.

What do I mean by this?

At first glance, the above statement doesn’t seem very provocative, companies have been downsizing for some time. So what’s different? The most pronounced difference is a fundamental mindset shift from the office sector’s darling of demand during the 2010’s, the Tech sector.?

Toronto is one of the best cities to observe this shift, as it’s one of the strongest Tech markets in the world and has been the strongest office demand market in North America. As depicted in this graph, Toronto’s lowest vacancy sub-markets all of a sudden became the highest ones. The obvious reason for this would be that leases for smaller companies are shorter, plus a pandemic happened so the logical thing to do is ditch office space (true).?

But there’s more going on beneath the surface when you talk to founders. Stuff like this:

Company X has 14k sq. ft. and with a growing headcount was planning to get to 75k by 2023. Instead, they ditch their office and go remote.?

Company Y was planning to take 12-15k sq. ft. of space after raising Series A but instead took 7,300 and reimagined the concept of the office (real story from client, Conductor by Sensei Labs in my April, 2021 article "What is the cure to the workplace pandemic?" - shout out to legendary CEO of Sensei Labs, Jay Goldman for his 'pointy end of the spear' thinking on this deal).

Company Z has 20k sq. ft. with 2023 expiry (in 2019 told me they’d need 40-50k at expiry) and 10k they took in Hamilton in the pandemic. The CEO tells me “I wish I could ditch Hamilton like yesterday and I can’t see how I need more than 10k of central space for my whole Greater Toronto Area team.”

Company XX extends 16k sq. ft. lease under favourable terms from 2024 to 2027 in the spring of 20’ thinking that hybrid work will allow them to get use out of the office longer than planned. In 22’, puts the entire space on the sublet market stating “we only need 5-10 coworking seats for those who want somewhere other than home.”?

I could keep going but you get the point.

Additionally, the number of new leases signed and the size of those leases are WAY down when comparing 2017-19 to 2020-22 timeframes (additional posts on all of this hyperlinked throughout this article ??). And while many want to pin these realities on a looming recession, to me it’s a structural shift in operational models and talent attraction/retention toward Remote First.

Then there’s the more “traditional” sectors within our economy like Big Banks, Big Tech, Consulting etc. and while much of this story has yet to play out due to leases that are set to expire, we don’t have to look too far in the news to see that further downsizing/consolidation is going to happen because of hybrid working than was previously contemplated.

The data is showing us that this Covid induced inflection point has caused a massive structural shift within Tech and a more pronounced shift within the broader market. This = structural vacancy for the office sector.

#1

Employees used to follow the office, now the ‘office’ will follow them.?

What do I mean by this?

It means we are moving away from an era of ‘HQ magnetism’ (the employee must move to SF, NYC, or Toronto to get the job) and into an era of employee autonomy; an era where an increasing number of employees will have agency over where and when they do their work.?

So in this sense, however we define the ‘office’, it must follow them and not the other way around. This doesn’t mean that all of a sudden everyone is going to become a digital nomad, far from it. But for those who supply/service the office it does mean leasing space hasn’t just gotten harder (ie. less demand), it’s got more complex (it’s less about features and more about behaviour).?

The demand will still be there for those on the supply side who evolve with the needs and desires of both their customers and the end users. And ‘customer’ can’t just be a convenient substitute for ‘tenant’ anymore. It has to mean it. Landlords, developers and their brokers have to provide integrated solutions and fully engage with the Space-as-a-Service sector, either directly or through partnership. And they must understand that choice over location is the greatest ‘amenity’ they can offer end users of the built environment. Because the reality is, they are competing with the places we all call home in every sense of the word, so it’s steep competition! And companies can’t expect their people to engage with spaces that aren’t flexible, convenient and don’t have a healthy work culture within them.

There’s a reason Antony calls the emergence of the SPaaS asset class the Trillion Dollar Hashtag though, it’s because the opportunity is HUGE! (I hope I’ve adequately conveyed that with my list). And interestingly enough, the opportunity can equate to cost savings + better environments for companies while also driving better top line revenue and bottom line profit/asset value for landlords. The planet also stands to get some much needed retribution, with the possibility for less space per employee and higher building utilization metrics becoming the norm, not the exception.?

That’s it for my Top 10 List! I hope you enjoyed reading it as much as I loved writing it for 10 early mornings in a row over a coffee that was frequently interrupted by my daughter, Elle awakening from her slumber too early (??). I’d love it if you challenged any of my assertions in the comments as it’s my hope that they can stimulate debate and ultimately progress.

Dave

P.S. A special THANK YOU to Antony Slumbers for giving me permission to release this private content to the public born out of a video interview he conducted with me for his Trillion Dollar Hashtag Course - be sure to register with me to take his next cohort starting in January!