Investor solutions to a changing demand in CRE

For many investors, the temptation will be to increasingly chase a shrinking base of low-yielding, long-let assets. However, for those seeking higher returns, embracing the challenge presented by changing occupier demands will be key to consigning short-let property's recent underperformance to the past.

Tom Grounds from Strutt&Partners advises investors to put in place tenant retention strategies and increasingly adopt solutions which will help to reduce the time between tenancies and minimise transaction costs.

A major issue with short leases (or leases with limited time remaining) has been landlords’ void costs in the aftermath of a tenant leaving, not to mention any necessary refurbishment. As the trend towards short leases continues, it will be vital for investors to make the transition to new tenants as efficient as possible.

It will be vital for the real estate sector to keep driving efficiency in the letting process, and providers seeking to achieve this are already entering the market. For example, commercial property leasing and asset management software platform VTS allows agents, developers and landlords to view their leasing activities and portfolios in real-time. Sales an marketing platform Rialto is focused on helping investors, operators and agents active in flexible workspace adopt a workflow which helps them significantly reduce transaction costs. LeasePilot, a US–based company, has developed a document automation platform allowing the process of drafting and editing leases to be sped up significantly.

Two promising technologies which will most likely impact the speed, efficiency and transparency are:

• Big Data - on basis of artificial intelligence and machine learning, demand and supply in the real estate market will be connected. 
• Blockchain – the encryption technology underpinning the online currency Bitcoin – will allow buyers and sellers to conduct secure, rapid transactions via secure Blockchain networks.

Without doubt, we will see this part of the market grow quickly in the coming years and pressures from the occupier market’s desire for flexibility will drive landlords and agents to seek greater efficiencies through automation and technology.

Flexible workspace operators are providing a solution for one of a landlord’s chief problems; they allow landlords to cheaply match space to smaller, flexible tenants and get them into the building and paying rent more quickly than a formal leasing process. Practically speaking, they allow investors to fill in the space in their buildings that emerges between longer leases from major tenants, or, perhaps, to fill space quickly and effectively, whilst positioning the building for a major refurbishment or redevelopment.

Although operators have been around for some time, serviced offices have seen a sharp expansion in recent years. Moreover, the sector’s offering has widened considerably to include ‘coworking’ space, ‘accelerator’ space and others, marking its maturation from a fringe sector to one actively sought out by tenants seeking to support their operational business needs.

Looking forward, we expect this trend to continue; but perhaps with an even wider offer and some small structural shifts as landlords become more involved in the market. Indeed, we are seeing some office investors take the view that rather than outsourcing the issue of tenant flexibility to serviced office providers - with the providers taking on the management and being rewarded with the ‘profit rent’ – they should more directly engage and take charge of the underlying cashflow themselves.