A rising number of my office working friends earn additional income outside of their day jobs, or in the parlance of our times, they have a ‘side hustle’. Increasingly though side hustles are not just for employees – more and more companies are getting in it too. Landsec used to be a property developer, owner and manager. Today operator can be added. It operates two Landsec Lounge cafes and it will open the doors on Myo, its new flexible office product, this year. Other office landlords have similar projects – British Land is expanding its Storey flexible workspace brand whilst Grosvenor and Great Portland Estates are both planning to trial their own shared office concepts. Myo – the new flex space offering from Land Securities. Photo source: The Financial Times Limited 2019. All rights reserved Meanwhile, real estate agents including JLL, CBRE and Cushman and Wakefield have set-up their own accelerator and incubator programs for fledgling real estate start-ups. In so doing they have become seed funders and early stage tech investors. Diversification is not new for these businesses but directly investing in tech start-ups companies is a novel approach. Another way to describe side-hustling is entrepreneurialism. Big corporates used to have a clear advantages over their competitors. Business scale was insurmountable and budding start-ups could not hope to compete with their vast corporate machinery to access clients or build new products. Today the high barriers of entry have gone. Technological change means that a laptop and an internet connection are all that is needed to bring new ideas, products and solutions to a global market. This has created new competition for incumbent real estate corporates and forced them to become more entrepreneurial. Corporates were slow to realise this disruptive change but they have now woken up to the threat. In response they are trying to diversify and disrupt the disruptors. Landlords managing flexible space in-house is a direct response to the impact that WeWork, Regus and a host of other brands have had on occupier demand. The move by real estate agents to invest directly in tech start-ups recognises the fundamental threat they pose to their traditional business model. We see three main implications of corporate side-hustling for real estate investors: The war for talent is old news but the escalation of corporate side-hustling means that it will intensify further. To respond to structural changes, established companies must fish in new talent pools and this requires new types of occupied space. The tech talent being sought by financial services is a major reason behind the wholesale adoption of flexible working practices and workplaces by companies like HSBC, PWC and JP Morgan. Real estate investors who provide the type of product sought by new corporate models stand to benefit higher demand and, ultimately, greater returns. In the brave new tech-disrupted world, change is the only certainty. Business must expect to be disrupted and a great way to protect against this is to diversify. Doing so protects revenue and enables them to proactively spot and adapt to industry change early. In large part this explains elevated M&A activity – global M&A reached an all-time high of USD 3.3 trillion in the nine months to September 2018, according to Thomson Reuters. M&A looks set to continue and will drive further occupational change and greater market churn. As a result investors should expect greater consolidation of office space, negative net absorption but increased take-up and ongoing flight to quality. The third implication is that landlords will need to treat occupiers more like guests. Occupiers are being courted by new types of entrepreneurial businesses, such as flex space. They are also being offered technology that empowers them, such as Stowga, the “Airbnb of logistics”. The upshot for landlords is that occupiers, their most treasured commodity, will become more fickle and demanding. An investor mind-set that accepts the balance of power has shifted in favour of occupiers is required, one which emphasises the importance of relationships and better service provision to aid occupier retention. This will lead to better prospects for rental growth and hence performance. Tom Duncan Senior Analyst – Investment Strategy and Risk
Property companies are muscling in on the flexible workspace format. Landsec is set to launch its flexible office brand Landflex, Great Portland Estates is growing its Storey brand, and Grosvenor and British Land are set to trial their own offerings. Furthermore, property agents JLL, CBRE and Cushman and Wakefield have incubator programmes for property start-ups that see the companies become investors in technology start-ups. This trend comes as landlords respond to the threat to their business model that comes from flexible workspace brands such as WeWork and Regus.