Over recent years, the commercial and retail leasing landscape has undergone a seismic shift. Gone are the days of corner stores and family newsagencies setting up shop and remaining in that location for 20 plus years. Technology has both seen industries or types of retail shops disappear altogether and contributed to changing how we use office spaces – noting the discernable trend is for companies to require less space.

The Changing Face of Retail

In the last ten years, technology has drastically changed the types of brick and mortar retail stores occupying our local shopping centres.

This is hardly a new evolution.

Music is a prime example of an industry that has responded and adapted to these changes moving from records to cassette tapes to compact discs to iPods. Consequently, many music chain stores closed or greatly reduced their number as people downloaded music on iTunes or online. Popular retailers Big W and Kmart also downsized their in-store music offerings, instead stocking MP3 players and music streaming accessories. Similarly, online shopping has also put a dent in the traditional retail experience.

Society’s changing demographics is likely to impact retail’s future with an aging population dictating the types of shops available, for example, health care and wellness might outnumber bookshops and news agencies. Some retailers may also downsize as their industry changes. 

The Impact on Retail Landlords and Tenants

Landlords and tenants will need to keep pace with retail’s evolution. Landlords will find that certain industries are no longer viable as tenancies and may have to adapt their premises to new services or retail industries to pick up lost business. Tenants could benefit from a downturn in occupancy rates if certain industries disappear and obtain cheaper rentals in certain circumstances.

The Changing Office Space

Offices across Australia, and indeed the world, can also feel this technological shift. Modern offices don’t require staff to be physically present in one place in the same way as traditional offices.

The modern office tends to rely on consultants collaborating online, and not necessarily operate from the same physical space. Offices, including government departments, are moving from expensive CBD locations to cheaper metro or regional locations. Hot desking and open-plan offices are the norms, as are staff working remotely from their home of another location (third spaces). We also see the advent of “smart work centres” whereby companies from different organisations come together to share an office space.

In practical terms, this means that commercial organisations require less floor space than they may have ten years ago. In fact, some service industries relying heavily on technology, such as website designers can scale back their operations to the point where they can use a casual hotdesk in a smart work centre rather than set up their own space. Great for the website designer, but where does this leave landlords and commercial real estate investment in general?

There are two main trends when it comes to the changing face of office space – hotdesking and smart work centres.

Hot Desking

Hot desking occurs where an organisation does away with allocated desks for workers and just creates some generic desks that workers share. This means that workers changing teams or locations around the office can sit anywhere. It also assists housing part-time workers.

This trend is continuing as more and more offices move to a paperless setup, meaning all that is required is a laptop or computer login. Although, hot desking has come under fire as employees cannot “nest” in their desk and this requirement to set up everyday may impede productivity. Hot desking could potentially cut up to 30% of the office space a company requires.

Smart Work Centres

Smart work centres or “third spaces” are spaces outside the home and office which allow people to log in and work from a remote location.

In January 2014, the Institute of Sustainable Futures, UTS, released a report entitled Smart Work Centres: An Analysis of Demand in Western Sydney. The report considered how third spaces could be established to assist our workforce to achieve greater work/life balance.

The NSW Government Smart Work Hub Pilot Program established five hubs in Penrith, Rouse Hill, Oran Park, Gosford and Wyong to allow commuters to work from the hub rather than commute into the Sydney CBD. The outcome of the pilot was positive with the report finding smart work centres would be positive for high commuting areas like the outer suburbs of Sydney and places like the Blue Mountains and the Central Coast of NSW.

How do These Changes Impact Commercial Leasing?

The changing workspace, namely working remotely, hot desking, and smart work centres have long-ranging impacts on the commercial real estate market. The unavoidable takeaway message from all three trends is that the traditional office is phasing out. Consequently, Landlords will see either tenants opting to use smart work centres on a casual basis instead of renting property in their own right. Alternatively, tenant’s may lease smaller spaces as working remotely and hot desking increases.

Landlords will either need to convert large spaces into smaller suites or re-think their leasing procedures and the marketing of their property. For example, perhaps leasing to a collective of businesses who “hotdesk” under the one large lease may be an option for some landlords.

Interestingly in the Smart Work Centres report is the idea of establishing hubs on the CBD’s fringe. Commercial landlords may then also need to consider where they are investing in commercial real estate moving forward, noting properties outside of the CBD may become more attractive regarding investment propositions for landlords.

The Jones Lang La Salle Australian Office Investment Market Review and Outlook (March 2015) supports this view as while the Sydney and Melbourne rental numbers increase, Brisbane and Perth experienced a contraction in numbers during the same period. Whether this is due to the resource boom crashing or the impact of the changing workplace is a matter landlords, and tenants should consider.

There is also a business opportunity for tenants in the form of leasing space to hotdesk and licence casually to people requiring an office space or conference room. There will be a growing market for this type of service to freelancers, consultants and other remote workers, particularly if that person cannot work at home and the collective space offered corporate services and an inviting atmosphere.

Key Takeaways

The retail and commercial landscape are unquestionably changing and in retail, technology is replacing certain industries. Thanks to a combination of hotdesking and remote work arrangements, including smart centre hubs, office space is also reducing. Whether you are a landlord or tenant, both will need to rethink their roles to adjust to this new frontier.

What do you think the future holds for commercial leasing? Tag us on Twitter @legalvision_au and let us know.

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