Offices ‘at the centre of the storm’ globally
By Sara Seddon Kilbinger, Senior Reporter, REFIRE
Facility management becoming more critical as dissatisfaction with office space worsens
The office market is ‘at the centre of the storm’ globally as more and more tenants become dissatisfied with the widening gap between their business objectives and their current working space, according to the latest study by the Urban Land Institute (ULI) and The Instant Group.
Just 14% of tenants believe their current office space is fully in line with their business objectives and 62% of landlords expect their current valuation model to reduce capital values, according to the study. Worryingly, fewer than 2% of owners believe they have the necessary capital expenditure to respond to tenant and ESG requirements.
‘Our study shows that despite the transformation the office property market is undergoing, physical workplaces continue to be important for companies to attract and retain talent, instil corporate culture and improve employee productivity,’ said Lisette van Doorn, CEO of ULI Europe. ‘However, on the tenant side, it is not yet conclusively clear how much space is needed and what the premises should be like. Therefore, they need a flexible strategy from the landlords, with whom they are embarking on this journey together.’
Tenants continue to explore the impact of activity-based workplaces and hybrid work models, which require greater flexibility on the part of landlords, according to the study. In addition, landlords are battling the cyclical challenges posed by rising interest rates, continued high inflation and high construction costs. According to research conducted by The Instant Group, demand for flexible office space has increased by 29% globally since the pandemic.
‘At the same time, landlords are trying to position themselves for the future in this phase of dramatic structural change, with demand shifting towards more flexible and energy-efficient spaces, including comfort and services,’ van Doorn said. ‘They also face cyclical challenges such as rising interest rates, high inflation and construction costs, limited availability of equity and debt capital, and high capex requirements. While tenants are critically reviewing their needs and building features as their lease expires, landlords may not enjoy the luxury of the market improving, but may need to act in the short term to protect their rental income.’
In total, 285 office tenants, landlords and external consultants from North America, Europe, Asia-Pacific, the Middle East and South America participated in the study. In addition, extensive interviews were conducted with leading industry experts and two rounds of discussions were held to explore tenants' changing requirements, landlords' response and the impact on their business models.
Lease structures need to evolve
In addition, the current survey shows that 80% of landlords and 75% of tenants expect greater flexibility and adaptability of tenancy agreements in the next five years, although there are regional and sector-specific differences regarding what this should look like. However, there is widespread agreement on the development of new leasing structures that allow tenants to increase or decrease their office space under the lease. ‘This means that the leasing relationship must continue to evolve into a partnership between landlord and tenant,’ said , CEO Partnerships at The Instant Group.
However, the need for shorter, more flexible rental periods and usage-based (pay-per-use) services requires a re-think of the business model, not least because 62% of landlords expect capital values to decline based on the current valuation model, which only recognises long-term leases. Just as providers of office space are evolving their strategy towards a ‘space as a service’ offering that focuses on the operational management of buildings, a reorientation in property valuation is also required. Valuations need to take into account the value of additional services and offerings, the partnership between landlords and tenants, and a strong brand and reputation. The impact of flexibility and changing rental periods should also play a role.
For landlords, it is critical to improve energy efficiency. While tenants focus on reducing overall rental costs, for landlords improved energy efficiency is a prerequisite in order to retain tenants and secure rental income. Technical aspects, such as consideration of usage and energy efficiency, which used to be ‘nice to have’, are now becoming a necessity. In this context, appropriate data collection becomes mandatory for more transparency and the achievement of net-zero targets.
Facility management becoming increasingly critical
Closely linked to this is, of course, the growing issue of facility management, which takes on a new significance when office use is rapidly shifting. The German facility management market is growing, which requires a high level of innovation and so-called FMTechs are advancing digitalisation in the industry. At around €72 billion, Germany’s facility management market was the largest in the EU when it was last surveyed in 2020, and is expected to grow to around €85 billion this year, according to the Facility Management Monitor, which PwC, RealFM and Built World have compiled for the first time.
The survey – which questioned 100 experts - shows just how much work still needs to be done. Fewer than 10% of respondents are completely satisfied with their facility service provider. Two thirds of users are currently planning to renew or renegotiate their contracts in the next six to 36 months. This is also influenced by the fact that there were hardly any cancellations during the pandemic. Sustainability efforts, increasing inflation and new workplace concepts also have a dynamic effect on the number of outplacements. Going forward, more than half of users and service providers would prefer medium-term contracts of three to five years.
‘Cost reduction, sustainable management and environmental protection are not opposites,’ said David Rouven Möcker, partner and head of Real Estate Consulting at PwC Germany. ‘Intelligent facility management is the key to a future-oriented real estate industry. New working worlds, digitalisation, environmental protection and sustainability are changing both the way services are provided and the relationship between client and service provider.’
Dirk Otto, president of RealFM e.V., agrees: ‘The demands from the core business have evolved and will continue to increase in the coming years due to current regulatory, commercial and technical developments,’ he said. ‘The dynamics require constant knowledge building, a high willingness to innovate and an intensive exchange of know-how.’
FMTech space leading the charge
In addition to a global market overview, the report also looks at trends and the growing market of FMTechs. As with the PropTechs, these are providers that cover the entire life-cycle of real estate, offering specific solutions for processes and services in the area of facility management.
Digital eco-systems form the business basis of such start-ups. In the operational procurement of goods and services, supply chain management, contract management and tendering and awarding play an essential role. Cloud platforms and Natural Language Processsing (NLP) technologies for rule-based services can be used in the tendering process to find the best suppliers. This is designed to create the basis for digitally optimised maintenance and operations management. In the future, FM service providers are expected to focus more on the intelligent collection and evaluation of data - primarily in the decarbonisation of existing buildings.
‘The analysis of energy consumption across all trades is indispensable in order to determine optimisation potentials, implement reduction measures and be able to adjust savings,’ said Kai Ukena, manager in the Real Estate Consulting division at PwC. The monitoring of the building management system is also one of the possible uses of digital solutions from FMTechs.
Survey respondents have also highlighted further shortcomings. Around 37% cited the ever-increasing expense of issuing notices and changing contracts as something negative. Moreover, the share of smart buildings in the contract portfolio is currently a paltry 5% or less, according to 70% of users. In addition, 26% of those surveyed said that a lack of acceptance and a lack of discernible benefits among decision-makers are hindering the implementation of an ESG strategy. More than 50% of users estimate the payback period of sustainable investments at five to ten years. Area optimisation and modern building technology are named as the greatest resource-saving potentials and there is a pressing need for more advice on sustainability issues.
About two-thirds (60%) of users and service providers believe that the effectiveness of HR consulting can be increased by closer cooperation between the facility management and HR Management and a whopping 72% of the users are firmly convinced that the facility management, including its services, actively contributes to the success of the business.
The sales volume of the entire global facility management industry amounted to around $747 billion in 2020 alone, according to the survey. Annual global growth of around 6.2% is forecast for the industry as a whole up to and including 2023, with the expected growth of the three largest markets worldwide ranging from 3.8% for the EU to 6.6% for North America and 7.5% for the Asia-Pacific region.
One facility manager looking to expand is Germany's facility manager with the highest turnover, Spie Group which is focusing on both climate protection and demographic change. The group is targeting annual turnover of around €4 billion by 2025. Markus Holzke, CEO of Spie DZE, a subsidiary of the group, has reported considerable demand for ways to make portfolios ESG-efficient. The company takes this into account with its Go! Green initiative, which includes monitoring and analysing CO2 emissions. The company is increasingly relying on the tool FM Analytics, which it developed itself, to systematically record malfunctions and identify the causes more easily.
Since the start of Spie DZE in 2013, the group has taken over a total of 24 companies or platforms with more than 14,000 employees. According to Holzke, this has added capabilities in the technical operation of areas and facilities. However, he wants to maintain the company's status as a technical specialist, so expansion to include services such as waste disposal and cleaning services is not currently planned.