Revitalizing Vacant Office Spaces: Adding Flex Suites to Boost Lease Up
Unlocking Value in Underperforming Office Spaces with Flexible Leasing Solutions
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Today's newsletter presents a case study of a Repositioning Strategy implemented on an Office Asset. For confidentiality reasons, I won't be able to share specific details or names.
I'm sharing this case study because it's timely. Many Office Assets in major CBDs face potential value issues, and Asset Owners must find solutions. Failing to do so will impact fund performance and value.
The case study is structured around the following main topics:
Building and Context
The Problem
The Opportunity
Development Scenarios
The Solution
Now, let's dive in.
1. Building & Site Context
Understanding the key building characteristics and its location is crucial. This helps identify any technical characteristics of the asset and any limiting constraints. The location informs us about the market, rental values, average tenancy size, and type of occupiers.
In this case, the building is in a peripheral area of Milan, next to a major transportation hub, and faces a large piazza with significant footfall potential.
The location is accessible from the city center in 15 minutes by public transport.
High-speed rail network connects to Rome in 2.5 hours and Turin in under an hour.
The international airport is only 15 minutes away by car.
Building Key Highlights:
Completed in 2015.
LEED Gold Certified.
Vacant since 2019.
7-story building, all designed for office use.
Levels 0-4 designed for a single tenant.
Levels 5-6 configured for multi-tenancy.
Average floorplate size: 2,500 sqm.
Total Lettable Area: 20,700 sqm.
Leasing market context:
Smaller Tenants: High demand for spaces below 1,000 sqm
Medium-sized Transactions: 1,000-5,000 sqm, representing a significant portion of recent office transactions
Supply Dynamics: 25% increase in available office spaces in Milan compared to the previous year
Historical Transactions: Consistent demand for both small and medium-sized office spaces, suggesting a favorable market for subdividing and leasing smaller office units
2. The Problems
It’s essential to spend time analyzing the current situation to understand the problem clearly. Once this is established, mapping out a strategy and finding a solution becomes easier.
We conducted an information-gathering process and interviewed the Asset Management and Facilities Management teams.
This resulted in the following list of issues:
Vacancy: The building has been vacant since the COVID-19 pandemic.
Non-autonomous Systems: Only levels 5 and 6 have autonomous MEP and HVAC systems.
Subdivision Issues: Difficulty in subdividing Floor 1 without creating unattractive sub-tenancies.
Market Demand: The need to accommodate a variety of tenant sizes and preferences.
Floorplate Size: The average Net Lettable Area per floor is 2,500 sqm, which is oversized for the local leasing market.
These problems highlight the task's complexity, with a mix of technical and market constraints that need to be addressed through option analysis.
3. The Opportunities
Having listed the asset's key problems, we now focus on the opportunities the building offers. Identifying building-specific opportunities helps uncover areas with potential to add value and create a Unique Selling Proposition to market the new vision.
Here’s a list of opportunities identified during the information-gathering process in Step 2:
Activate Floor 0: Potential to animate the piazza and increase footfall through retail.
Flex Suites on Floor 1: Catering to the growing demand from smaller tenants ranging from 200 to 400 sqm.
Multi-Tenant Leasing: Subdividing floors 2 to 6 to cater to different tenant needs.
Temporary Leases: Leveraging floors 5 and 6 for temporary or traditional leases.
4. Development Scenarios
With a clear understanding of the building’s problems and opportunities, we can develop a strategy focusing on the scenarios most likely to succeed.
Initially, we considered both Single-Tenant and Multi-Tenant scenarios.
The Single-Tenant scenario was quickly eliminated for the following reasons:
It represents the status quo.
There is low demand from Single Tenants in the current market.
We considered three key scenarios for multi-tenancy:
Multi-Tenant Scenarios with:
Option 1: Limited retail and smaller flex office suites.
Option 2: Larger flex office suites with no retail.
Option 3: A balanced mix of flex office suites and retail offerings.
Analysis of Pros and Cons for each Scenario:
KPI Metrics for Each Option:
5. Solution
The recommended option provides a balanced approach to repositioning the building, leveraging the fact that the higher floors are already autonomous and fully fitted out, ready for potential occupancy.
This solution allows the Capex investment to be phased and the higher floors to be leased immediately, covering the running costs of an entirely vacant building.
Summary of the Recommended Repositioning Strategy:
The rationale behind the proposed recommendation is as follows:
Lease floors 2 to 6 with a multi-let strategy.
Market floors 5 & 6 as soon as possible for temporary or traditional leases. Complete floor subdivision and light retrofit work only after a lease is signed.
Consider Ground Floor retail to accelerate leasing and provide amenities to office tenants, subject to validation of a Business Case.
Consider leasing Floor 1 to a Flex Office operator to satisfy demand for smaller occupiers, subject to validation of a Business Case.
Conclusion
The strategic repositioning of this asset involves a balanced approach to cater to market demands, using a mix of retail, flex offices, and multi-tenant office spaces to enhance leasing potential and generate optimal returns. The phased implementation ensures flexibility, minimizes upfront costs, and addresses market trends and tenant preferences.
Key Takeaways:
Current Status: Vacant office asset in the periphery of a major city.
Problem: Currently designed for single-tenant occupation with oversized floorplates and low market appeal.
Opportunity: Activate the ground floor and introduce Flex Offices to cater to a broader market.
Solution: Reposition as a multi-tenant building with retail and flex offices, and introduce temporary leases to mitigate running costs.
That's all for today.
See you next week.
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