As the call to repurpose and revitalise the grey space market grows ever louder, what does this mean for owners of office-centric real estate?
Catering to a post-pandemic workforce
It is safe to say that the grey space market has experienced a shakeup in the past year. Whilst many still hold a firm belief that nothing beats face to face teamwork, the majority of businesses seem resigned to the fact that, to stay competitive as an employer, they must continue to provide an enhanced work-life balance that many employees have now experienced. The most likely route for many businesses will be a hybrid between working from home and the office, which will inevitably mean a reduction in office space lettings. Landlords will be keen to keep hold of corporate tenants, but the savvy will recognise the need to both spread the risk and ensure that the office spaces they bring to the market offer more than just a desk, kitchenette, and bathroom.
Live, work, play
In the residential market, many customers expect an array of amenities all under one roof, including gym, cinema, cafe, launderette, gardens, and co-working space. This ‘lifestyle’ transition is happening in the commercial sector as well. You only have to look to experience-led retail and vibrant co-working spaces to see this in action in the commercial environment also. I believe that the pandemic has sped up this process significantly. What was once a luxury will now far sooner become an expectation, particularly within offices in prime city-centre locations, and landlords need to be ahead of this.
Incubator spaces
Commercial landlords looking to spread risk are diversifying from offering strictly office spaces to having a diverse mix of tenants and vendors all under one roof. Mixed-use diversification usually includes complimentary service offerings to appeal to the workforce and create a community-centric space, such as well-being zones, fitness studios, events space, food & beverage, beauty salons, art studios and retail. There is a growing trend for spaces that can be converted easily with temporary walls or movable room divides to ensure it can meet different uses depending on the time of day, and an unstable market will ensure that potential tenants will value flexibility. Young companies require spaces with reasonable fit-out costs and a space’s ability to act as an incubator for fresh concepts can generate a welcome hype amongst other tenants, as has been demonstrated by the pop-up phenomenon in retail.
Are specialist operators the key?
Caution is advised for landlords when it comes to structuring the operational side when converting office space to mixed-use. Fulfilling a landlord/operator hybrid role for a commercial space in which all floors are occupied by office tenants is one thing. Converting the excess office space to appeal to different types of tenants and manage a diverse collection of spaces requires one or more specialist operators. Landlords will do well to recognise the need to invest in outsourcing these specialist skills for a better chance of success.
What does the lending landscape look like for fluid mixed-use real estate?
A term being bandied about currently is the ‘hotelification’ of office buildings, with enhanced amenities including improved food and beverage offerings alongside members club-style amenities. Some landlords may choose to take this a step further and add a residential offering with onsite rooms to rent.
Even if landlords decide to add a residential element, any mixed-use or semi-commercial space borrowing will be treated as a commercial mortgage. Lenders will assess the business plan or require a financial forecast of the potential rental returns. As discussed, the office space market has been hard hit by the pandemic so innovative spaces that can accommodate a diverse range of tenants and demonstrate demand aside from just those seeking desk space could prove to be a more appealing lending option in the current market.
Bring in the experts
The current environment presents many potential variables, so it’s important for investors to consult a specialist debt advisor, or commercial mortgage broker, to structure a bespoke debt package whether this be for acquisition, development, refurbishment, conversion or refinancing.
An advisor that understands the mixed-use commercial space will be able to navigate the crowded lending market to find a product to suit the budget and LTV requirements and a lender partner able to give an investor the best chance of making a success of their space, as well as offering greater flexibility further down the line should any issues arise.
There is much opportunity for the acquisition of prime office space currently but to create a viable business, investors are having to be more strategic, consult experts, collaborate, and know their target market better than ever. Whilst we cannot eliminate David Brent-esque characters, the stereotypical dreary grey office so perfectly immortalised in The Office is set to become an endangered species. The office is getting an inspirational, healthy and reenergised makeover to match the modern-day workforce and I am certainly here for it.
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