Property owners can no longer passively sit back and take steady rental income for granted. To build a successful real estate portfolio, a more active, customer-driven approach is required, explains Jonathan Bayfield.
Read this article to understand:
- How real estate sectors have evolved from being driven by location and functionality
- Why technology has forced new thinking and structural change
- Why focusing on service and customer need can attract a substantial premium
At the turn of the millennium, when the technology revolution was just getting underway, owning and managing commercial and residential property was all about being functional. Property owners weren’t interested in bankrolling capital expenditure into their assets; they wanted to collect their rent and benefit from a reliable stream of income. Leases were invariably longer than ten years, in some cases over 20 years.
The only factor that mattered was location. For those of us working in front of a computer, there was no alternative to going into our workplace or office. In the retail sector, if you wanted to buy something, you had to visit the shopping centre or high street. Property was very much ‘needs-based’.
New challenges, new response
The world has moved on. The technology revolution has had a profound impact on how we live, work, play and learn, forcing new thinking and structural change across several real estate sectors, from retail to residential, and from offices to laboratory space. The COVID-19 pandemic accelerated these changes.
Retailers have seen their footfall crater as home-based shoppers let the delivery truck take the strain
This has been felt particularly sharply in retail. While some retailers are still able to lure shoppers into their premises, untold others have seen their footfall crater as home-based shoppers let the delivery truck take the strain. Property owners and tenants instead have to really focus on their customers and give them a reason to visit, typically by offering a high level of service or opportunities to engage with a product or brand.
One company that has succeeded spectacularly in this regard is Apple. When you visit one of its spacious, stylishly appointed stores, you don’t just make a purchase. You have your device fixed, obtain after-sales care, get training on products, sit in on presentations from experts or simply mingle with like-minded devotees.
Apple was one of the first companies to understand the importance of ‘community’. Similarly, by bringing together a wide variety of discounted high-end products, designer outlets have found a positive way for owners and occupiers to work together to create an engaging and unique retail experience for customers.
Enticing workers back to the office
The office sector is facing a comparable technological challenge, from video conferencing services such as Microsoft Teams and Zoom. This, together with the need to offer employees an ‘experience’, is compelling property owners to shift their focus to how their tenants or end-users create value.
The offices of the future will need to bring talented people together to share ideas and collaborate
The offices of the future will need to bring talented people together to share ideas and collaborate. Humans are much better at problem solving when there is trust; buildings need to be designed, equipped and managed to facilitate that.
Gone are the days of call centres with banks of desks. Now, it’s about offering plenty of light-and-airy open spaces where you can sit down, eat, have a coffee and even enjoy a few social drinks in the evening. After two years of workers enjoying home comforts, offices must be transformed into not just enticing, ergonomically well-designed destinations, but also collaboration hubs that can extend their users’ horizons. You can learn more about re-imagining the office of the future in this video How to build an office: Post-pandemic.
Lab space demands closer collaboration
The need for being together for innovation and problem solving is perhaps most evident in the life sciences sector. Doing lab experiments in your kitchen or study is unlikely to be the best solution! But similar to other sectors, there is a need for close collaboration.
Tenants are likely to have ever-changing requirements in terms of how much and what sort of space they need, plus access to sophisticated laboratories. The cost and time needed to deliver such items can be significant and, as such, having an ever-evolving offering able to adapt to the needs of a range of occupiers is vital.
Amenities a must have for residential
In the residential sector, the last ten to 15 years have demonstrated that top-value properties can effectively demand higher rents by offering a greater quality of service. High-end residential properties have emerged in dense urban areas targeting the type of earners happy to pay up for added facilities or ongoing services. Concierges are becoming commonplace, as are gyms and jacuzzis.
The service ‘value-add’ is evident in the more affordable end of the market
The service ‘value-add’ is also evident in the more affordable end of the market. That, for example, could mean something as simple as a seasonal visit from Father Christmas in a lower-rent suburban single-family residence.
The transformation has been especially remarkable in the student sector. Your typical no-frills digs are now being supplemented by luxurious en-suite accommodations featuring common areas, gyms, study zones, laundrettes and even cinema rooms. Despite extremely high rents, demand held up well during the pandemic and heavy and sustained international appetite suggests this part of the market will remain resilient.
Even in the one sector in which location is still king – logistics – there is evidence that service is forcing its way to the top of occupiers’ criteria alongside function. Some of the leading players now offer a variety of cafes, while childcare and leisure facilities are also becoming available.
The importance of being active
Space has evolved to become more about the quality of service, which we are seeing across real estate sectors. Whilst acknowledging this requires capital expenditure from property owners, there is strong evidence that end-users are willing to pay what is sometimes a substantial premium.
Sitting back and taking rent is no longer an option
Sitting back and taking rent is no longer an option, while the days of limited capital reinvestment and rare external valuations are almost over.
Property owners with imagination, commitment and understanding of their end-users’ needs as the transition from a needs-based to a service-based approach gathers speed will reap the rewards.