Investor-Occupier Collaboration Strengthens as Real Estate Prioritizes Quality

Increasing Alignment Leads to Heightened Dialogue and Transparency

Investors and occupiers are finding themselves drawn together as they navigate economic uncertainties, strive to reestablish office presence, and pursue sustainability objectives. This growing emphasis on quality real estate, characterized by environmentally friendly specifications and desirable workspaces, has triggered a significant transformation within the industry. Traditionally transactional and occasionally adversarial, the relationship between investors and occupiers is now evolving into one of cooperation and partnership.

In a conversation with Beverley Kilbride, European COO of LaSalle Investment Management, and Andy Poppink, CEO of JLL EMEA Markets, we explore the driving forces behind this shifting dynamic and the current state of the real estate sector.

From the occupier's perspective, what fuels the demand for quality real estate?

Andy Poppink highlights three key factors: the office's pivotal role in future business operations according to most real estate executives, the need to meet ESG requirements driven by regulations and stakeholder expectations, and the economic impact on business, real estate, and the labor force. These considerations drive occupiers to seek investor partners who can provide spaces, leases, and terms that help achieve their goals.

And what motivates investors to prioritize quality?

Beverley Kilbride identifies ESG as the primary driver, with a shift from intentions to measurable ESG journeys. Tenants are now inquiring about the carbon footprint of buildings and its impact on operational performance. The flight to quality extends across sectors globally, not just limited to offices. Within office spaces, the implementation of hybrid work and organizations' projections regarding future space requirements have led to occupiers seeking fewer desks, more collaborative spaces, and higher levels of service. Investors are compelled to elevate their strategies accordingly.

Are investors required to step up their game?

Beverley Kilbride affirms the clear polarization in the market, emphasizing the distinction between Grade A stock and other options. This limited supply, coupled with sustainability goals, presents LaSalle with opportunities for ambitious renovation projects. Nevertheless, challenges such as the absence of consistent accredited standards and valuations, cost uncertainties regarding the supply chain, materials, and labor, necessitate careful consideration by investors. Despite potential fluctuations in inflation, the demand for quality real estate is expected to persist, resulting in premium prices.

How does occupier demand for flexibility and quality impact lease agreements?

Andy Poppink acknowledges the occupiers' desire for shorter and more flexible leases that accommodate dynamic workforces. However, quality spaces require significant capital investments, which can make shorter leases more expensive for occupiers. Striking a balance between flexibility and affordability becomes a collaborative effort between investors and occupiers. Beverley Kilbride concurs, noting the shift towards closer partnerships and ongoing dialogue to ensure both parties achieve their objectives. ESG and operations play a crucial role in this evolving relationship, as ongoing collaboration is necessary to reduce a building's carbon impact.

How do shared goals foster transparency between investors and occupiers?

Andy Poppink highlights occupiers' desire for clarity regarding the delivery and performance of properties and property management services. Similarly, owners seek to understand occupier requirements to meet their expectations effectively. Enhanced communication during the early stages of the process, data-driven due diligence, and comprehensive ESG reporting contribute to increased transparency. Beverley Kilbride emphasizes the departure from the traditional landlord-tenant hierarchy, with ongoing dialogues expanding beyond lease terms and rent. Transparency has become a norm, facilitating collaboration and engagement on various fronts.

In summary, the real estate industry's flight to quality is forging stronger ties between investors and occupiers. Their converging interests necessitate increased dialogue, transparency, and shared accountability, ultimately fostering cooperation and enabling collective success.