Revenue, Retention, Reputation: Why the Traditional Landlord Approach is Changing
2 / 02 / 2018 · Charlie Wade
Historically the primary focus of the vast majority of office landlords was to secure enough tenants to fill their buildings as quickly as possible. Their modus operandi was simple: persuade an occupier to sign as long a lease as possible, with a minimum rent-free period and on a maximum pounds per square foot rent, in the quickest way possible. Once the tenant signed on the dotted line the landlord could essentially not worry about that tenant/building until a lease event loomed large on the horizon.
Even a couple of years ago this might have been an acceptable way of operating, but today it’s not enough. Having a good quality, well located building might get potential occupiers around your space for that all important first viewing, but getting them to commit to a lease is much more complicated.
It’s not just about the physical property
Today’s occupiers aren’t just looking for four walls and a roof – they’re increasingly looking for an attractive package of additional extras. Super-fast broadband connectivity is a given. They also want a good on-site food and beverage offer and in terms of the office space itself they want a diverse range of different options, such as break out space and collaborative work areas. Oh and flexible lease terms would be nice.
It’s no longer simply about market dynamics with supply and demand dictating what level of service or possible “extras” will be offered by the landlord. The supply offering has fundamentally changed and occupier choice now comes in a variety of competing forms where space as a service is the mantra. Tenants as a result are demanding more and this new level of market place competition is giving them the leverage.
The need for workplace productivity is driving change
The reason tenant demand has shifted is simple: many businesses currently occupy workspace that is inefficient. This was underlined in The Workplace Advantage report, which was published by The Stoddart Review in late 2016. The report foundthat only 53% of the UK’s office workers feel their workplace enables them to be productive. That means a whopping 47% of employees are not as productive as they could be thanks to their workplace holding them back. The report suggested that companies could easily boost productivity levels by 1% to 3.5% simply by focusing on how their workspace could be used as a way of generating revenue and adding value to a business rather than being viewed as a cost that needs to be managed.
Many businesses have taken this message on board and this greater focus on workplace productivity is just one of the factors behind the rapid rise of co-working or serviced office space that are challenging the traditional landlord model. Providers like WeWork, who in addition to offering more frivolous benefits like bottomless free beer on tap, also offer modern workplace environments and a wide array of tenant services that are focused on boosting workforce productivity levels. Customer experience is at the heart of their offering.
Modern landlords are responding
In response to this trend, last year saw a growing number of UK landlords start to focus on the range and quality of services provided to occupiers rather than on the physical space. I will add that not everyone is simply reacting, there are examples of landlords who preempted this shift and subsequently developed schemes with a clear focus on the customer experience very much at the center of their plan. They have been best placed to capitalise on the changing occupier landscape and subsequently reap the rewards. However, the vast majority are still playing catch up and it's expected this push will continue to gather pace in 2018.
This shift in landlord attitudes is also a reflection that many of them have cottoned onto the fact that they can enhance their financial returns by improving their service provision. The evidence is clear in the market but this was also underlined in a report published by the British Property Federation in late 2016, which found that landlords who invest in building relationships with their tenants could see a 1.9% increase in financial returns per annum.
The three-year research project found that landlords and building managers must ‘build professional, collaborative and empathetic’ relationships with occupiers and show understanding of their business needs to improve their levels of customer service. Managing tenant relationships is a must do for the modern landlord.
The report also highlighted the importance of ‘providing clear and transparent documentation and making sure occupiers understand the value of the services they receive, and that a relationship of trust must be established’. I would suggest the traditional draft lease, negotiation and legal process, might be due a dramatic overhaul.
Treating tenants as customers pays
On publishing the findings Howard Morgan, founder and managing director of RealService, a customer experience consultancy that works with property owners and managers to ‘enhance the experience of occupier customers’, said: “This pioneering research proves what we have intuitively known – that there is a direct payback in terms of the three R’s of real estate – revenue, retention and reputation – for treating tenants as customers.”
Despite the potential financial rewards on offer, adopting a customer centric approach is a transition that could be difficult for many traditional landlords, but as competition from a different form of supply and with more choice being offered by their competitors, these landlords face a simple choice: adapt or become obsolete.
Charlie Wade is the UK Managing Director for VTS. Prior to joining VTS, Charlie spent almost 10 years at JLL in London, New York and Silicon Valley.