Beyond activity based working: Why smarter, “learning” organisations give commercial property developers and owners something new to worry about. By Graham Lauren, director, Shiro Architects.
Driven by the products of a rapidly accelerating and ever-smarter internet startup culture that disrupts every legacy business in its path, how will commercial property owners deal with the future’s likely increasingly rapid displacement of jobs?
Technology affecting workplace employment
In April this year, federal Treasurer Joe Hockey said he wanted to encourage businesses to employ people who were "restarting" their careers at the age of 50 or 60, particularly those switching from jobs in manual labour.
But, what is the realistic future for both older people and workplaces themselves when more and more work can be done by intelligent machines instead of people, or only performed by highly qualified people in partnership with those machines?
In June, a report by the Committee for Economic Development of Australia (CEDA) predicted that technological advances could replace 5 million Australian jobs in the coming two decades, from accountants to real estate agents and even some of the roles currently performed by doctors.
Ultimately, a more fundamental challenge ahead is that as even those businesses still employing people become internet-propelled “learning organisations”, this will inevitably lead them to find new things to do in less costly ways, with ever fewer heads.
An extreme example may be that when Instagram sold to Facebook for $US1 billion in 2012, it had a headcount of just 13 people, but it’s a pointer to what may be coming.
Then, compounding all of the above, massive advances in “machine learning” - machines learning from machines, crunching unprecedentedly massive data sets - are already afoot, in which, say, a world of driverless cars is already becoming a reality.
So, what does it really mean for developers, owners and investors in commercial property when technology-enabled networks, marketplaces and robots become better at engaging human talent than traditional companies?
And what does it mean also when those mobile technologies that are already contributing to the change mean those among us who still have jobs may no longer need to be at the office at all? *
Associate director of global corporate services at CBRE, Tony Armstrong, is in no doubt that the potential shrinkage of employment resulting from technological change is the challenge to, not least, commercial property of our time.
“The way things are changing so fast is absolutely one of the most crucial aspects of all of the talk within the CBRE network, and within the research that we have been involved in the last six to 12 months, [as] there are huge corporations out there now that are building platforms that will do thousands of people out of a job,” Armstrong says.
Indeed, the central prophecy of an acclaimed 2011 essay in The Wall Street Journal, Software is Eating the World, by Silicon Valley venture investor and inventor of the first internet browser, Netscape, Marc Andreessen is now coming true.
Pete Carstairs, research manager at property giant Investa, says, “In some ways, our industry is quite simple, but it is going through the most change I can remember, brought about by the fact that our customers are facing all the challenges of technology changing the level of competition out there.”
That sentiment is echoed by Daryl Browning, chief executive of unlisted property fund ISPT, who says, “For much of the working population, people have been following through a logical process of going through university, doing your time, and then you will advance.
“But most of those rules have been rewritten. If you have an idea, the internet and all of the social media have now made it possible to link your idea with the money and get it commercialised quickly.
“So, in the new universe, what are you going to work at? We are now talking about a lot of the white collar jobs being substituted by a combination of offshoring and electronic or intelligent devices, so how does that then impact all of the traditional business models … if the workplace is not populated by humans?”
As a consequence of seeming ever-increasing startup activity, others such as Tim O’Connor, head of office leasing at JLL, marvel at the activity taking place at the bottom end of the nascent startup accommodation market.
O’Connor says, “A few years ago, if you’d said to someone, you are a new company, why don’t you set up on a floor where there are lots of other startup companies, and there are no walls and your privacy is really only in the context of you going and sitting in a meeting room, people would have looked at you strangely. But people are really gravitating to that now.”
Entrepreneurs and innovators respond
This shock of the new has already filtered into the big fashionable ideal at the top end of town for activity-based working, or ABW.
Its spaces allow desk-freed workers to coalesce in free-flowing groups, equipped by mobile, wireless devices.
These should be zones in which agile, innovating, learning employes roam, creating the futures of their organisations, but the reality is far more prosaic: many companies have simply used the design innovations of ABW solely to cut costs by shoehorning more bodies into smaller spaces, with obvious knock-on effects for property owners.
CBRE’s Armstrong says, “Companies were really just trying to screw down hard, hard, hard, and landlords are feeling a lot of that pain, as some people have taken ABW down the wrong path.
“They got so caught up in being able to fit a whole load more people in that they actually forgot the whole organisational premise of ABW was to provide workplaces where people could use the best facilities to support their work.
“I think there is a bit of a push back now, as companies are going to be forced to put more quiet spaces in and develop better rounded workplaces, with better facilities.”
But, he says, “It is just a temporary hiatus, and then it will continue to be less people.”
More optimistically, developer Andrew Harper, founder of Brisbane’s Cornerstone Properties, points to the advantages of companies that learn first to put these new facilities to work, saying, “The real emerging trend is less about cost-cutting and more about innovation and productivity.
“It has been recognised early in creative industries, such as IT and architecture, that the dividend available to companies that can result from collaboration and improved communication between staff will be improved productivity and innovation.”
Harper believes, “This trend will spread to all industries as the need to increase productivity and the need to innovate become essential survival tools for all companies confronted with new disruptive competition.”
But he cautions, “Many companies will require a new breed of building to achieve such a workplace. This will create obsolescence in our current national stock of buildings.
“However, some clever and innovative developers and property owners will seize the opportunity to redesign existing buildings to incorporate the design features required to become the ‘office of the future’.”
For their own part, however, smarter technology-propelled startups are now shaking the property world itself, introducing their own new contribution to an abundant resource stock.
Alex Pham, national research manager at agency Cushman & Wakefield, points to the leisure sector’s hotel-substitute, Airbnb, as being now, “literally the largest real estate company in the world, yet it doesn’t own a single property.”
Others, such as Liquid Space, in whose Australian business GPT recently took a stake, helps commercial property owners and occupiers put their available meeting and work space out to work by others.
Acclaimed by interviewees for this piece, for its part, the ingenious US operator WeWork takes out a cut-rate lease on a floor or two of an office building, divides it into smaller parcels and charges monthly memberships to startups and small companies that want to work in close proximity to each other.
Such innovations put to work the “idling capacity” to be found in many industrial-age businesses, and could potentially add a new level of pressure to which legacy incumbents may find it hard to respond.
Certainly, it’s a threat, but none here is prepared to forecast when, or even that, caused by massive technologically driven industrial disruption, there will be a crash for many significant property owners.
“In the extreme case,” JLL’s O’Connor says, “take a Lehman’s [bank] for example, when they collapsed, they had a lease and you’d say that owner has really suffered.”
But, in today’s landscape, he doesn’t foresee such an event as either inevitable or a calamity.
Indeed, the wash-up of these interrelated trends, he says, is, “not going to move the needle that much, but the opportunity to work in a more dynamic environment [is that] these communal or co-working spaces may just drive a bit more demand for office space.”
Flexibility the key
Yet, that we are undergoing a revolution in where and how we work no one denies, it is nonetheless a shock to a trusted and long-established system.
Startup activity may be imposing a new future on landlords, but some owners are using the opportunity to shift away from the established model to behave more flexibly.
From a product perspective, Investa’s Carstairs alludes to significant changes in the offerings his company will bring to market, offering a mix of spaces for customers of different stripes and sizes, none of which he wishes yet to discuss publicly in detail.
But, he says, “Although this is an increasingly important part of what we have to offer, it will still be a small part in the overall portfolio. I absolutely wholeheartedly believe that over the next say five to ten years there will be a greater number of more flexible types of spaces around the place, but that there will still be a need for a normal lease with large companies, and that won’t change.”
Nevertheless, Cornerstone Properties’ Andrew Harper says, “If you don’t move with the times, you will just end up with empty buildings. You have to keep changing them.”
But he observes two problems with changing the mix, and makes perhaps an obvious point. “The obvious ideal is for smaller startups to grow into their accommodation. But, a lot of the rigidity in office buildings comes down to financing.
“The traditional financing of an office building is very reliant on the strength of the tenant and the lease term that the tenants have signed up to, so everyone chases the big tenants for the long leases because that is the way to get your valuation up, and therefore secure your finance.”
But, there is now even a question of industry longevity, ISPT’s Browning says. “In reality, will the industry of the business that is supposed to be paying the rent that creates the investment be around, and can they keep paying the rent for the 10, 15, 25 years?”
Adapting to cater to startups, Harper says, “You are really changing the nature of the investment to one in which your financing must be wholly different and not dependent on a tenant with a balance sheet and a long lease. There is nothing wrong with the model, it does work, but you just need to be well capitalised to do it.”
Catilys Properties’ development manager Richard Wykes says there are also problems when coping with reduced demand for office space by changing usage.
“Multiple-mode buildings where you have a hotel on the ground, an office in the middle and resi component above may be a really great idea, but who is going to fund it, if all of a sudden the asset becomes different?
“The market is driven by the investors whose mandates for investing are quite tight, and they might ask, can you control all those moving parts, because, once you start divvying up a building with strata you lose control, so who has the appetite for that?”
Daryl Browning believes however that, “Most businesses will adapt to that over time, but if you have a fairly rigid structure, it could present challenges [in loosening it up] and allowing that flexibility to cater for what the market is doing, and then really selling the proposition to investors that it makes sense to operate on that basis.”
Winners and losers
Despite scepticism also about the adoption of ABW, as the panacea for workplace productivity, Tony Armstrong believes that, counter to the trend of diminishing workforces, significant employers using temporary, or increasingly project-driven workforces may now find themselves compelled to spend more on their workspaces as the headquarters building becomes the glue holding together a company’s culture.
One thing all agree on is that apart from the flexibility incorporated in differing building structures, this must now be matched by that found in future lease terms.
JLL’s O’Connor says the challenge is, “How do you become more flexible, how do you create a strategy and structure that works for those [startup] companies, because those companies are looking at it and saying, we don’t know where we are going to be in 12 months or two years’ or three years’ time.”
“I think the winners are going to be those who can be more flexible and provide that environment and that structure, and the losers are going to be those who from an owner’s perspective are going to say, well, we’re very regimented and we need a minimum three-year term and we’re not going to deviate because we’ve always done leasing this way.”
Cushman & Wakefield’s Pham concurs, “The simplest model of all is owning something and charging rent, but what we are also proposing to our clients and the landlords are changes in the way contracts are designed.
“For example, we are talking about ‘tenancy at risk’, which means in the contract you will allow a portion of the space leased to a tenant will be fixed for say five or ten years and a portion will be on a flexible basis so tenants can re-lease or sublease or even break the lease.
“Like a set of flexible options for the tenant and it’s win-win situation for landlords and tenants, who then they have an option to expand their business if needed.”
How crucial is data?
At the end of the day, the biggest changes in the workplace, its workers and forms still lie ahead, and every industry and every organisation will have to transform itself in the next few years, perhaps in many ways, or fade away.
Whatever, the internet is not yet done with the property industry.
Investa’s Carstairs says, “Yes, some businesses are going to fail and jobs will disappear, but I am more of a glass half-full kind of guy about this, and from my particular space there are a lot of opportunities for people who understand data.”
Along with increasing internet capacity only exacerbated by innovations such as the NBN and the mooted one billion new users coming online globally over the coming five years, the future in the property industry’s own accelerated learning and ability to adapt its models at speed lies in data.
Carstairs adds, “Ten years ago, I might have been the guy in the corner no one cares about, but going forward his data insights might be those that drive strategy, and I am excited by that because that is my space. If I was in some professions, I would probably be a lot more worried.”
* Anyone who underestimates the sheer potency of this question alone might take heed from this, published in July in The Economist, which is hardly prone to exaggeration: “[The] new iPhones sold over the weekend of their release in September 2014 contained 25 times more computing power than the whole world had at its disposal in 1995.”
Graham Lauren is a director of Shiro Architects and is leading its workplace research for a book themed "beyond activity based working", addressing among other things the challenges to owners, investors and developers of commercial office space in an emerging Learning Economy.
Feature image credit to Living Edge.