Real estate’s flight to quality is bringing investors and occupiers closer
Converging needs are leading to more dialogue and transparency than ever before
Investors are wary about the economy. Companies are trying to attract people back to the office. Both camps are working toward their sustainability goals.
This all makes high-quality real estate – buildings that meet green specifications, or spaces that companies want to lease and where employees want to work – what everyone wants right now.
The convergence on quality is bringing about a major shift in the industry. The relationship between investors and occupiers has long been largely transactional, and at times even adversarial. But it’s increasingly becoming one of cooperation and partnership.
Read on for a discussion about the drivers behind this changing dynamic – and the state of real estate in general – with Beverley Kilbride, European COO of LaSalle Investment Management, and Andy Poppink, CEO of JLL EMEA Markets.
What's driving demand for quality real estate from an occupier standpoint?
Andy Poppink: Most real estate executives – three out of four, according to JLL research – believe the office is key to their future. They want their people back together, collaborating and innovating, so they’re seeking flexible, amenity rich, quality workspaces. Remember, it’s still a historically tight labor market, so the competition to attract and retain quality people remains extremely high.
Second, they want to meet ESG requirements due to both regulatory demand and the true demand of their clients, customers and people.
Finally, and more recently, they’ve become very concerned about the economic impact of the bottom line on their businesses, real estate and labor force.
Those three things are top of mind for occupiers now and for each of those, they need investor partners who are providing space, leases and terms that help them achieve those goals.
What about with investors? What’s driving them to quality?
Beverley Kilbride: On the investor side, ESG is definitely the main driver. But there's been a shift from good intentions to creating a measurable ESG journey. That’s because their tenants are now asking about the carbon footprint of the actual building and how that will translate into operational performance.
We’re seeing this flight to quality globally and across all sectors, not just offices. But when it comes to office space, the implementation of hybrid work and projections from organizations about future space requirements means we’re seeing occupiers asking for a reduction in the number of desks, coupled with an increase in collaborative space and a very high level of service.
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So are investors now having to up their game?
Beverley: Absolutely. There has been clear polarization in the market between Grade A stock and the rest. Subsequently, limited supply, and the desire to hit sustainability targets, creates opportunities that help LaSalle take on ambitious renovation projects.
For instance, new technology is coming through and innovation is vital if we’re to deliver buildings with improved performance and occupier desirability.
However, we’re at a stage in the market cycle where we haven't yet got clear market practice and consistency in accredited standards and valuations. We're also navigating cost challenges and unknowns around the supply chain, the price of materials and labor.
These are all factors that investors must take it into account. Even if inflation falls, it’s unlikely that material costs will come down, so future supply pipeline will remain under pressure for some time to come. It means there’ll be ongoing competition and we’ll continue to see quality real estate fetching a premium.
How about leases? Is occupier demand for flexibility and quality having an impact there?
Andy: Occupiers are conflicted between their demands for shorter, more flexible leases that cater for dynamic workforces, and the availability of the spaces that meet their priorities. Quality space requires capital investment but then inherently, the shorter the lease, the more expensive it is for the occupier. It’s about finding balance and working in partnership with investors. I don't think you could write a rule today that says leases will necessarily become shorter.
Beverley: I agree. We’re now looking at closer partnerships and constant dialogue on how we adapt operations and investments to make sure both parties are achieving their objectives, so that’s a real shift in the dynamic.
Andy: ESG and operations are a key driver in this relationship shift because most of a building’s carbon impact occurs from ongoing operations, which is absolutely a shared activity. So we need to continue to work as partners throughout the duration of leases.
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How are these common goals driving greater transparency between parties?
Andy: Occupiers want to know what a building and property management service will deliver, and what the performance of a property might be. On the flip side, the owner is trying to understand what they need to do in order to meet occupier requirements. It will require greater communication early in the process, particularly due diligence in the collection of data to facilitate well-informed decisions. And then there’s the metrics and ongoing data collection that’s needed to support the ESG reporting requirements of both investors and occupiers.
Beverley: Without a doubt there’s increasing transparency – we're no longer in the traditional landlord-and-tenant hierarchy. We’re now sharing more information with occupiers on an ongoing basis, talking about so much more than lease terms and rent. Those dialogues and the levels of engagement are very different to previous cycles.
You can no longer buy real estate and be hands off. It doesn't work. You must be hands-on and in collaboration throughout. There’s a common agenda, even if at times the hierarchy in terms of priorities is different.
Andy: If we step back and look at business thinking more broadly, this year’s Davos theme was ‘cooperation in a fragmented world’. That shows an increasing recognition of the criticality of partnerships. The ongoing resilience that we’re witnessing in real estate markets all comes down to the ability of investors and occupiers to work towards common goals. So that ultimately, we get there together.
Contact Beverley Kilbride and Andy Poppink
European COO LaSalle Investment Management and CEO JLL EMEA Markets
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