In house operation Vs outsourcing
In recent months we have seen an acceleration of franchise partnerships signed by global flex space providers which further demonstrate the growing appeal of this model. But is outsourcing the best solution for landlords? We have compared below the two scenarios:
The main benefit of outsourcing to an existing operator is that it is easy, typically quicker than setting it up yourself (Although not always the case) and will generally deliver a return faster given the existing operator will have customers on their books already.
However, it can also be costly – most providers charge 10% to 15% on gross turnover – it provides less control especially for integrating the flex component to the overall leasing strategy of the building, and it can be more hassle depending on the quality of the provider.
It also can be difficult to manage risk given the operator will often demand full freedom to run the operation under its business model and will be less capable of adapting to specific requirements. For example, it might be beneficial for a landlord to offer a highly discounted rate for a large portion of the flexible workspace in order to accommodate a large lease over the balance of the building, but the flex space operator may not be inclined given this would not be beneficial for their operation. Outsourcing also gives much less visibility as the knowledge of the customer base remains with them.
Furthermore, in the context of New Zealand there is limited numbers of flex space providers with depth of expertise with IWG being the only operator providing solutions to both corporates and SMEs. Partnering with global providers can be difficult when they typically invest limited resources into understanding the local market.
In house operation
The best local example of a successful in-house operation is Precinct Properties’ Generator co-working. The integration of the co-working operator into Precinct’s operations has enabled them to retain a competitive advantage by providing seamless integration between the traditional leasing and flexible workspace offering. When thinking about in-house operation landlords should consider the following key metrics:
- Layout density – typically between 6.5 sqm and 8 sqm per workstation. Although this may seem like very high densities the combination of occupancy and utilisation result in an effective density of 10 sqm to 12 sqm per occupied seat
- Pricing – a key component of delivering strong yield is pricing management. Ensure to provide a mix of inventory varying in sizes & quality (Internal Vs external offices) to offer choice
- Capex investment – critical to achieving good return is making clever choices in the use of materials, design of services and power and data. Typical costs from a standard base build condition range from $1,300 psm to $2,500 psm
- Add on services – one key differentiator of flex space Vs traditional space is the provision of services. Ensuring you have a mix of services – permanent office, co-working desk, pay as you go office and meeting room, IT & T, printing facilities, plant rental etc… will help achieve super return without requiring much resources to set up and operate
- Leveraging your existing resources – in house property manages can be a very good way to think about how to resource your flex space offering without incurring additional cost
- Wow factor and optimisation – Many flexible workspace providers do not think enough about the importance of customer experience. The key to successful flex offering is to ensure that the space provides a wow factor without impacting the layout density. It is critical to ensure the design is driven by inventory metrics rather than the other way around.
- Sales & Marketing – finally you will need to think about how to market the space. In today’s digital world it does not require much marketing investment provided it is done correctly. Furthermore, due to the nature of flexible workspace the spend require will decrease overtime as the occupancy reaches mature levels.
Flexible workspace in numbers
So, what does a typical operation look like from a number’s standpoint? Our analysis below provides average financial forecast for typical flexible workspace operations in the Auckland region for an A grade asset. For lower grade assets the mechanics are the same except the cash payback may be longer given the increased ratio of fit out cost to rent. The long-term margins however tend to be higher depending on the level of service revenue.
Note the figures below have been adapted to reflect a landlord operator situation:
- Capex investment – $1,500 to $1,900 per sqm per annum
- Operational cost (Excl. rent) – $450 to $650 per sqm per annum
- Gross revenues – $1,200 to $1,700 per total sqm per annum or $1,500 to $2,125 per sqm per annum
- Gross profit – $750 to $1,050 per sqm per annum
- Opening Occupancy – varies between 15% and 45%.
- Monthly occupancy growth – 3% to 7%
This will heavily depend on how the operation is set up and the extend of current resources. If we look only at marketing most operators spend between $10k and $20k per annum on marketing with a one off spend for pre-opening marketing of $15k to $20k.
Overall, it is clear that the owner/operator scenario delivers more benefit for the owner provided expertise can be sourced to help with the strategy, design and construction of the site. Although it is a relatively simple business to operate there are key errors that must be avoided in the planning stage to ensure strong returns are achieved.
If you are a landlord or a tenant with surplus space wanting to explore what flexible workspaces could do for your business, we can certainly help. We have the strongest expertise of any New Zealand firm in this regard employing experts with over 20 years combined experience – Pierre Ferrandon – Gwynn Hoskins
If you would like to know how we can help you get in touch with us for a chat.
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