The 1997 study Right Space: Right Price?, produced for the RICS by the Department of Land Management and Development at Reading University, identified major changes in business practice and the demand for space.
These changes are a result of increased innovation, globalisation and new organisational forms. Three years on from the study and the evidence of these changes is even more apparent and the speed of change with the advent of e-commerce even greater.
The study concluded that these changes were driving new occupational patterns, and in particular affecting the length of lease a business was prepared to take, as well as creating demand for more flexible occupational packages such as serviced offices.
It also described the concept of a core-peripheral structure in the labour market, with the core skilled staff on full-time contracts and the peripheral workers either part of an outsourced service or employed on part-time or short-term contracts.
There are many similarities with the 'Shamrock organisation' described by management expert Charles Handy, with three distinct parts or leaves: the core professionals, outsourced functions and a flexible supporting workforce.
There are profound implications for optimising occupational performance. The new business dynamics have created the demand for a more radical approach to the provision of accommodation and services. The supply side of this equation is examined further on.
It is apparent from the changing dynamics of the workplace that the occupancy life cycle will be entirely different from previous models and the old building life cycle loses much of its relevance. The exception could be where a large organisation still has a significant requirement for core space for its core staff. Its occupancy profile in this instance could be longer term and could be dedicated to a single building or campus.
However, with the continued growth in outsourcing and demand for flexibility, the most likely scenario is for a shorter occupancy life cycle.
There is another fundamental demand factor that is shaping the occupancy market, and that is the typical size of business units within the UK. The last government census revealed that 90 per cent of firms employed fewer than 50 people. Property research has supported this with statistics showing that 85 per cent of space is taken in units of 3,500 sq ft or less.
The changing occupier landscape means that the whole life approach needs to allow for the price of flexibility. A short-term lease may initially have a higher annual rent but over the whole life cycle should produce lower costs as the space profile of the occupier is matched more easily.
This could be viewed as a transfer of risk from the occupier to the landlord and for this the landlord will expect a risk premium. However, he should be in the best position to reduce this risk by the ability to attract further tenants when the lease expires.
Options for occupation
The aim of this section is to examine the supply side and identify the main options for occupation and relate these to the occupancy life cycle.
The supply side can be analysed in terms of type of tenure, length of tenure and provision of services. The options include:
Where an occupier cannot find a suitable building through the market then an alternative is that the occupier can build to its own specification and then arrange a sale and leaseback.
The services supplied by the majority of landlords are normally limited and therefore these have to be procured separately by the tenant. In addition, if the tenant's space plans change then the costs of a vacant void period have to be calculated, together with numerous other costs such as dilapidations, to produce a fully inclusive picture.
It is often the case that the real cost of occupation is underestimated, however with the recent introduction of new accountancy standards, increasingly leasehold commitments need to be properly reflected on the balance sheet.
With business planning based upon shorter timeframes, the ability to quickly establish or reshape a business unit or to commence a project is attractive. The major drawback is the limited size range of accommodation, with an upper limit normally of 2,000 sq ft. Serviced offices have also become victims of their own success with a shortage of space in many key locations.
In theory this could provide the ideal occupational solution for the majority of companies. However, it is apparent that there is a significant shortage of space being offered by the market. This supply gap is likely to be one area of the market that will develop at a fast rate over the next few years.
An interesting aspect of both this type of product and serviced offices is that a high standard of accommodation has to maintained at all times and the frequency of refurbishment and updating of facilities should be greater than with more traditional forms of office space.
The established position that office space for owner-occupiers is of a higher standard than 'speculative' office space could be reversed in the future with the need to offer a better environment to more transient customers. There is also much discussion in the market at present on the pressure for landlords to offer more extensive services to their customers.
The government's PFI programme is now well established and Project Prime, the outsourcing of the DSS estate, has set a model whereby costs will be reduced and greater flexibility will be achieved over a 25-year period.
Attempts to introduce this approach in the private sector have produced mixed results with the main projects comprising financial re-engineering exercises, based upon sale and leaseback principles, without significant outsourcing of services.
The costing models used for these types of solutions are based upon a whole life approach. The consumer will calculate how much their accommodation will cost over the period based upon their existing approach, while the supplier needs to estimate how it can reduce this through innovation and better procurement.
Risk transfer is an important part of PFI as the supplier usually charges a single annual unitary charge in return for taking some risk for changes in the accommodation requirements and risk on providing the services at an economic rate throughout the period. In Project Prime, for example, the space needs could vary by an agreed percentage over the 25-year term of the contract.
Conclusion
It is beneficial to use the principles of whole life costing to evaluate all of the above occupational options. For this approach to be successful a number of aspects should be considered:
- The occupancy life cycle for individual organisations needs to be understood and not confused with the building life cycle.
- The results of the whole life costing exercise will be largely influenced by the internal rate of return selected; a high IRR will make upfront capital investment less attractive.
- Property leasing can be viewed as a form of outsourcing. The market is becoming aware of this and is offering a greater range of options.
- With the increasing drive for business flexibility the occupancy life cycle is becoming shorter. Long-term commitments are likely to be judged less favourably and will have an adverse cost impact measured on a whole life basis.
- By offering more flexible occupancy packages there is a significant transfer of risk from consumers. Suppliers should be best placed to take on this risk without the need for a large price premium.
- The definition of core and peripheral space will assist in arriving at optimum occupational solutions. The occupancy life cycle profiles for each of these types of space will be different.
- When carrying out benchmarking exercises the use of the whole life costing approach can produce many benefits as it offers more than just a snapshot in time.
This article is an extract from a paper given by Fred Guscott to the third Occupiers Property Databank conference on defining, measuring and achieving occupier performance. The OPD can be contacted on 020 7643 9250.
Source
The Facilities Business
Postscript
Fred Guscott is head of the RICS Facilities Faculty and director of Eurica. Email: fguscott@ eurica.co.uk