What needs to change in the world of office leasing? Everything.

James Nicholson, Partner in Knight Frank's Strategic Consulting team, on how occupiers are being taken for a ride when it comes to leasing traditional office space. 
Written By:
James Nicholson, Knight Frank
12 minutes to read
Categories: service Occupier

The customer journey for commercial real estate is broken.  It’s easy to highlight this when you look at the customer journey when buying a car.

The manufacturer has a good understanding of their target customer, what they are likely to use a vehicle for and a car will be specifically designed to fulfill specific needs at a price point that the customers can afford. It’s a targeted product. 

As the consumer, your journey starts before you even realise you want or need a new car. Even at this stage you probably have an idea as to which car manufacturer you prefer. This is because you’ve been exposed to advertising in one form or another. 

At the next stage you have impetus to move ahead and, because it’s a big decision, you embark on information gathering, typically online.

Information is readily available because manufacturers know that most research is today carried out online. There are portals that allow you to search for a range of different car types, all in one place.  You can find out pretty much everything you need to know quickly this way. The market is transparent.

Following the discovery phase, you’ll attempt to evaluate your options and consider which product best meets your needs, at the right price point for you.

Purchasing a new car is a transparent process which allows customers to fully customise vehicles to their current and future needs

The chances are that this will be the car that you thought you wanted originally (but you didn’t know why), and as if by magic it will also happen to be the car that keeps coming up in your searches time and time again. The power of targeted digital marketing.

Having considered your options you’re ready to make final decisions - you may even have spent time in advance specifying a vehicle which aligns to your individual wants and needs. In most cases this can also be done online too.

But you’ll typically want to take the time to visit the dealership and experience the car in the flesh, before making a final commitment; but it’s fair to say you’re 85% of the way to committing by this stage and you’ve not even met a salesperson.

Even you haven’t spent much time researching individual specifications in advance, that’s equally not a problem because the car manufacturer will have given much consideration to what customers are going to want and need and will offer opportunities to experience this in the showroom.

The role of the showroom is to optimise the conversion to sales – to make this all very tangible. You need to be able to touch and feel something that’s as close as possible to the car that you will drive away. You’re ready to commit.

There are a multitude of options - you can buy outright, lease or consider different financing options, but these are all well structured and readily available to you.

The car typically comes with a services package, which gives you peace of mind that over a reasonable period of ‘ownership’ there will be no issues or surprises, and if there are these will be rectified immediately. The car manufacturer may also include routine servicing in the cost or at least fix the price, so that you know what your outgoings will be. 

The manufacturer will then do everything they can to ensure that when you do need to pop back for servicing, routine or otherwise, they provide the best possible experience. They know that customer care and the customer relationship is just as important as the process of attracting customers – this is what will determine whether you’ll buy another one of their cars in the future. Retention. 

Now compare this, using the same car purchase analogy, with the customer journey in acquiring a traditional office lease in the UK. 

In this hypothetical world, new cars are not branded – lots of people make cars but nobody has an opinion on who builds them best, or what they are striving for in terms of target market. These are cars for everyone and anyone – cars are manufactured with no clearly defined target market - they’re largely similar save as to how many people you can fit in the car.

There’s no mention of what they are like inside – this is baffling. And as a result manufacturers find their cars difficult to market because the products are not sufficiently differentiated. So there is little or no exposure of the product and service offering to the consumer.

As a consumer, when you start looking, there is no 'go to' place to view a list of available cars – you need to know where to look and discovery is difficult. But you can research everything else online so you start there. But after a while you get frustrated that the market is opaque. 

Because manufacturers have taken this stance, there are whole industries of people who circle around consumers looking to buy cars because they know that the market is opaque and complicated to navigate. 

Eventually you concede that you will need help to find the car that you want and you employ an agent to help with the search. They warn you, albeit you have already discovered this for yourself, that this is a complex process and without their help much could go wrong. They’re right, this is a big purchase mistakes can be expensive. 

Your search agent pulls together a list of available options and you visit each one. On the tour you note that the cars might look slightly different on the outside, but because the manufacturers have chosen not to add interiors, they’re all broadly very similar.

You ask why this is. You are told that because everyone’s different manufacturers don’t want to second guess who’s going to buy the car and get it wrong. You are assured that the chassis specification was determined by the investors in the car manufacturing company and was not really something that customers needed to worry about – it was an ‘institutional spec’ and of course would meet all your needs

So how do you turn this ‘chassis’ into a fully functioning car? Your agent informs you that it is your responsibility to fit out the interior. But where to start?

Your agent tells you he knows a seating company he could put you in contact with as well as some experts in technology and project management, to bring the car from chassis to fully functioning automobile.

The costs of all of this would be for you to shoulder and again, it’s advisable that you employ separate experts to manage the process. The ‘good’ news is that once you commit to leasing the car it should only take 6-9 months for you to make it driveable. 

So you’re ready to commit. At this point your agent requests the purchase information from manufacturer. The contract is a 75 page document which he advises that you would need to hire lawyers to negotiate on your behalf, but it should be all sorted in a few months when you can start the fit-out process.

Lease contract length is 10 years, because that is the market here. And note there would be a review of the leasing costs after 5 years – the cost would go upwards only, but how much is in the hands of the Gods – it just depends on the market at that time.

Again, you will have to appoint professionals to negotiate the outcome, but he did advise that you budget for the uplift – it could be a zero increase or it could be 25%. It’s a gamble but you are committed to it whichever way it goes. 

You ask about the service plan. But it transpires the plan is that you do all the maintenance, because the manufacturer assumes that you know all about cars and if you do not, well you can pay another expert to do it for you.

So how do you turn a shell into a fully functioning office? Where do you start?

What’s more, it is made clear in the contract that if you do not maintain the car properly you will be charged a big sum at the end of the lease when you hand it back. And by the way, don’t forget you will need to strip out those interiors you put in, because they’re not likely to be wanted by the next user.

So you walk out of the showroom entirely frustrated with the process – how can this possibly be the only way to buy cars?

But then across the road you see another car showroom, “Cars Sold Like Co-Working Showroom”. Of course the experience is totally different, but lets leave the car analogy behind and see the additional value that the Co-Working offering is making. 

Perhaps most importantly, the conversation is about how the property can enhance the value of your business. The focus is about connecting people through the community created by the property – connections that can help your business succeed and grow, but also enhance the overall experience of the place for your people.

The workplace 'App' enables people from your company to form business relationships with other members, as well as create interest groups in all sorts of subjects that maybe of personal interest to your staff. 

If that is not compelling enough, there are events and activities organised for you and your staff to participate in, and many different settings for your staff to hang out, quiet spaces and social spaces dependent upon their particular work activity or need, as well as rooms that can be booked on demand with the latest sophisticated audio visual and conferencing facilities.

This is all in the common areas, but you can also have your dedicated space which is already fitted out with desks and WiFi, and you can see it there and then. 

You can start to move in next week, after you have signed a simple four page contract in every day language. It commits you to no more than 12 months, and everything is included – all the technology, services, operations, events and access to the common facilities.

You can focus on your business whilst the co-working provider sorts out everything you need from a workplace as a platform for your business success. The overall experience and facilities are regularly enhanced and upgraded, leveraging data and community feedback to understand what is working well and what can be improved.

The community manager stresses it is the little things that make a difference to curating the overall experience and the team are passionate advocates of continually enhancing this. This is a dynamic environment in which your business can adapt and change, not a static solution which you are stuck with for 10 years. 

The co-working model has changed everything, but currently still only represents 4% of the overall market in London, which is the largest concentration of this space in Europe.

How far will it go in changing the other 96%, and the rest of our European markets? Some commentators would argue it is just a feature of the current market, and we will revert back to traditional approaches in the event of another downturn, but the majority are arguing that the genie is now out of the bottle and the market has fundamentally changed.

Smart occupiers are demanding ever more value, services and flexibility - and why should they not given the rapid pace of change in business. The focus is on Experience, Productivity and Agility, with Efficiency remaining a consideration but very much on the back seat. Remember real estate is only 10% of overall costs of a business, and typically less than 5% of the overall revenue.

Occupiers are asking themselves:

How can real estate be used to enhance the Human Capital of my business which in turn can grow my revenue through collaboration and connectivity both within the business and the cluster of businesses I work with?

How can my real estate provide a workplace experience that supports my talent attraction and retention strategy? 

How can I create a workplace experience that is so compelling my staff will invest in the commute to come into the office and work together rather than at home?

How can I procure dynamic real estate solutions that change with my needs, and can I start trading from next week not next year?

Landlords need to have a response to all of these questions, and that means changing their business model. It means learning from the co-working operators and developing a proposition that includes:

A proposition that is focused on a great experience and business value creation which includes design, but more importantly activities and events, services and insight, connection and community management 

Space becoming a service rather than a commodity. This means, in most cases, fully fitted out including furniture, WiFi, AV, kitchen facilities and photocopiers, as well as fully operated and maintained. 

Insight through data analytics to understand how the space is being used and drive initiatives to continuously enhance the experience and service delivery. 

A smart phone workplace App that is the conduit for the delivery of most of these services in a cost effective way, but also is the portal for interaction, feedback, and promotion for customers and within the community  

Doing all of the above is not expensive but takes commitment and the investment of time to develop a customer-centric, digitally- enabled culture.

Leadership, empowerment and behavioural changes are the key ingredients for success. Customers will migrate to those facilities that manage the customer relationship and experience more effectively, providing more value and full services, which in return will result in high rents and better asset performance.

Conversely, asset managed in the traditional way will fall behind in performance as voids and low rental growth will become common place. 

The fact is that the entire world is becoming more customer-centric and our expectations as consumers are, 'I want it faster, better, with more services and tailored to my needs'.

Anybody who thinks that the real estate is insulated from this is in for a big shock. 

James Nicholson is a Partner in Knight Frank's Strategic Consulting team. 

If you have read this blog with interest and would like to learn more about how we can help you cater better to the needs of your customer, please get in touch. Knight Frank's Strategic Consulting team works with landlords and occupiers to align real estate with key business objectives.

Inspired? Ready for change?