PROPERTY JOURNAL

Valuing flexible offices

What does the increasing demand for flexible office space mean for valuation, and how is RICS supporting members in this field?

Author: Charles Golding

13 July 2019

Flexible workspace means different things to different people, from the quietly efficient hum of a traditional serviced office and business centre to the dynamism of the latest co-working spaces. The concept might also bring to mind workers in a corporate environment queuing at a desk-booking system or eating cereal at their computers in the name of improved space use.

image © WeWork

In the modern market these are arguably all forms of flexible workspace. Valuers operating in this field therefore recognise the models and motivations for each, and have developed techniques to report value accurately and appropriately. The main motivations for flexible workspace today include the aftermath of the 2008 financial crash, technology shifts, and a longer-term trend for an increased number of small business and sole practitioners.

As with most recessions, the 2008 crash led to an oversupply of stock and price rationalisation, but in positive terms increased creativity and prompted a more liberal attitude to letting and space use. Concurrent digital developments meant that some companies and operators no longer needed to install complex IT structures, storage or filing systems, or seat colleagues doing similar work together, but could get new offices up and running effectively in a very short time. Meanwhile, a generation of tech-savvy graduates and others looking to work on their own terms is attracted to operations that provide facilities such as meeting rooms, private space, client areas and fast tech as well as a great cup of coffee without contracts or liabilities, even at a premium price.

Although these factors have all influenced the development of the modern, flexible market, some valuers have found it misleading to describe it as new: business hubs have grown up around key financial and educational centres since at least the 1950s, and skilled valuers have successfully operated in the field without great fanfare. All recessions in that time have been followed by a trend towards greater lease flexibility and creative use of property, and practitioners have arguably learned lessons by avoiding the bubbles created in other fashionable investment markets.

Needless to say, some suggest that a tipping point has now been reached and that the new flexible workspace represents a structural change as a result of the factors mentioned. Whereas in a traditional office model the shared space and service offering may have amounted to a communal seating area and printing facilities, co-working may now make up most of the space on a site with services extending, to in some cases, full food and beverage provision, childcare, fitness seminars and accommodation.

The aspirational Silicon Valley image of driven people starting giant corporations from offices full of modern art and pinball machines may be a cliché, but the amalgamation of work with service and lifestyle is a reality. Furthermore, the corporate attraction for taking up flexible workspace means that it is not only a small business trend: some multinationals are actively promoting an agile, demand-centred estate strategy that complements employee demands as well as reducing long-term costs.

Most valuers agree that there should be a framework for their practice in this field, although not a prescriptive approach, given that the market is defined by its innovative thinking and multiple facets. The RICS Global Red Book and other standards already include the components needed to value flexible workspaces, but there is further discussion about which, and how far each is used.

For example, some suggest the service element of an operator's offering is most akin to the fair maintainable trade measure used to value hotels, and that therefore flexible workspace is partly covered by the framework used for trade-related valuation described in the Red Book. This then leads into wider discussions about focusing first and foremost on the purpose of the valuation and whether it is the real estate, an interest or the entity that is being valued.

Beyond these there are further complexities around the effect and value of branding, and the way incentives between landlords and operators are analysed. The challenge as valuers is for us to start with first principles but also to account properly for the vagaries of this subsector. The wider real-estate sector wants us to achieve consistency, security and – the challenge faced across all markets – foresight.

"The corporate attraction for taking up flexible workspace means that it is not only a small business trend"
Adding mobility

Membership schemes and day rates create liquidity and mobility in the demand for flexible offices, which is far less restricted than traditional arrangements for the same space, and operates across regional and even international boundaries. When the asset is being valued, therefore, the failure to factor in physical space can cause issues. Where it is the entity being valued, the operating structure needs to be viewed carefully, and an array of market terminology then comes into play such as property company, operating company, internal corporate strategy or landlord direct, the latter used when a landlord sets up and manages a short-let serviced office operation in their building rather than a lease to a property or operating company. Experienced valuers in this market recognise the need to get back to what is being valued and how the web of interests is untangled and given appropriate consideration.

Something that has come across loud and clear from RICS world regions is that flexible working and the flexible workspace market is very much a global consideration. The market is more mature in certain areas, and major financial centres all have strong demand for flexible workspace in one form or other. A global market is not without its jurisdictional quirks, or indeed regulation; for example, planning, zoning and licensing regimes may be particularly strict, land supply more controlled, and financial reporting and valuation process can differ when it comes to, for example, tangible and intangible assets. One could walk into any of a handful of key branded operators across most economic centres in the world, and the underlying business model may be different in each.

It is recognised that changes in workspace models fit with trends in other markets such as flexible and short-term residential occupation, urbanisation in general, and pop-up retail and leisure sites. Changes in construction techniques, geotechnical and environmental issues are also affecting the way we work, interact and relax. But although wider issues around flexibility in economics and lifestyle are of interest, flexible workspace remains the most mature market where consolidation of data and opinion is felt to have the biggest impact.

RICS' goal is to offer insight on flexible workspace that will have a significant impact, addressing the issues discussed above and being useful across the global marketplace. We have received a great deal of feedback from operatives, investors, lenders and institutions that they need more support in this area, and we are acting on this.

Views are being collected from stakeholders across the globe as part of RICS' commitment to produce an insight paper on this topic in the near future. If you want to support this work, be involved in future conversations or even offer criticism of this article, please do not hesitate to contact me at the email address below. Your views, experience and expertise are, as always, the key to making sure RICS can produce valuable and informative content in this area.

cgolding@rics.org

Related competencies include: Valuation

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