Thinking About Physical Spaces
I suspect most of us are caught off guard by change at scale. When thinking about the pace of change over the last 15 years, it’s clear we’ve entered a new era, one in which technology is enabling us to rethink EVERYTHING. Change in how we design and occupy physical space is inevitable. The skyscraper boom began in the late 1800s and the product playbook in urban core office markets has remained mostly unchanged for decades. Similarly, the ways in which the office product has been developed and owned, the investment thesis, has been largely unchanged in how it relies on capturing the best occupants in leases that reflect the highest possible pricing and the longest possible term to generate stable net operating income and bankable future value.
When I walk around downtown San Francisco today, I see ghosts of decades past. It’s the early 1990s, I’m on California Street wearing a suit and tie, carrying a briefcase, like nearly all the other businessmen pushing their way along a crowded sidewalk. The buildings I see all around me are home to the headquarters of companies like Chevron, McKesson, Bank of America, Wells Fargo, and others. In terms of years, that wasn’t so long ago. But when you think about it in terms of technology, it was generations ago. We must accept the omnipresence of ever accelerating levels of change. This isn’t just about the office markets. It’s affecting all facets of how we live. E-commerce continues to shift how/if we use physical spaces to buy goods. Crypto and blockchain are changing currencies, reshaping how we transact. Technology has changed the music and publishing industries, the ways in which we consume the products. Change is EVERYWHERE.
Yet, it’s difficult to modify physical structures to keep pace with technology. You can’t rewrite the code of an office building. We’re in the early days of a new beginning for office, a time when someone is going to reinvent the product and get it (mostly) right. We’re starting to see the characteristics of this new product emerge. They include more flexibility, both in terms of the space itself and in how the customer engages with it (e.g., less long-term fixed lease obligations). The financial structure, the ways in which investors finance and generate profit from the office product must change, as well. The next gen office product will have these qualities.
Well-located building, with excellent daylight and compelling outdoor spaces (maybe views)
Amenities integrated into the building, including dining, bar, meeting spaces, recreation space, fitness, and spa facilities.
Service staff
Flexible spaces to accommodate a variety of uses, built to a high standard with high-end furniture, including the capacity to be rearranged on-demand.
Availability to rent space on flexible terms, by the month or year.
State-of-the-art technologies to enhance the occupier experience and enable the customer to access the product via app.
Short-term residential offering integrated into the project.
Ultimately, the future of the office product will reflect a melding of many concepts. It will have the serviced and flexibility aspects of coworking and hotel spaces. It will be accessible via app, able to be arranged just like an Airbnb. To be sure, the initial investment will be high, requiring deep pocketed, patient investors. The product pricing will have to be expensive to generate ROI, but the customer should be willing to pay more for its quality, services, and flexibility.
This is one way to fully embrace the changing needs of the customer, to meet them where they are. Investors are beginning to play with changes around the margins, integrating new elements into their existing offering. Yet so far, none have been bold enough to leap into the future to create something that does not currently exist. But it’s the right time to do so. What do you think?