Digitalisering ændrer spillereglerne for kontorudlejning

Digitalisation changes the rules for office letting
Image

When tenants are searching for commercial lease premises, a telephone call to the local estate agent or browsing the ads in the local weeklies are about to become a thing of the past. New research by Sadolin & Albæk shows that completely different channels have come into play.

By Andreas Brandt, Senior Consultant with Sadolin & Albæk Research & Valuation


FACTS

According to the EU’s ’Digital Economy and Society Index’, Denmark is the most digitalised country in Europe. Denmark tops the list in categories such as ‘Use of Internet’ and ‘Integration of digital technology’. In addition, a growing number of Danish businesses have become more frequent users of various digital services, including the social media, as part of day-to-day business operations.

The increasing availability and growing penetration of online apps greatly affect consumer patterns in society. Typically, it only requires one single click on a link for consumers to be redirected to a site where they can obtain more information about a product or buy it. This dramatically speeds up the consumer buying process.

Image

 

Digitalisation has caused important change in the way advertisements are run. According to the latest edition of ‘Global Trust in Advertising’ by analytical consultants Nielsen, consumers believe online ratings to be the most reliable, outranked only by recommendations from personal networks and various products’ own online channels. The growing influence of online ratings on the B2C (business-to-consumer) market ties in with the explosive growth of businesses such as TripAdvisor, Expedia and Trustpilot. For instance, TripAdvisor alone features more than half a billion approved ratings, and online ratings are increasingly used to support decisions. Digitalisation therefore plays a vital role in the consumer buying process.

Change in consumer behaviour feeds through to the office letting market
In a historical context, the office letting market has been a static marketplace, predominated by traditional sources of information. Among other things, advertisements in the printed media and estate agent contacts have been the preferred channels of information for the mediation of lease premises. In recent years, however, digitalisation has fed through to the office letting market too, and in this field the range of options available has seen a sharp increase for tenants and landlords alike.

Sadolin & Albæk has conducted a tenant survey of the office letting market to map the value drivers of tenants and their decision-making patterns when selecting new lease premises. The survey is based on interviews with 400 private businesses across various industries and business size brackets in the Capital Region of Denmark, with special emphasis on Copenhagen. To get close to the decision-makers, the target group was individuals fully or partly in charge of selecting business premises.

The tenant survey shows that the personal network is the most widely used channel when tenants are searching for new lease premises, ahead of online searches and estate agent contacts.

Image

It is worth noting that tenants only on a limited scale avail themselves of traditional advertising media when searching for new lease premises. Conversely, online searches have become much more commonplace and, broadly speaking, the tenant survey results confirm the notion that the office letting market has become increasingly digitalised and dynamic in recent years.

In addition, the tenant survey shows a preference among small businesses (2-19 employees) for the network as the most favoured research method. In addition, small and medium-sized businesses (20-49 employees) employ online search engines on a large scale too when looking for new lease premises. The survey indicates that small and medium-sized businesses integrate the digital tools in the search process but have no predefined search strategy.

It took the interviewed businesses 26 weeks on average to find new lease premises, but for more than 60% of the small businesses it took less than 12 weeks. The same applied to more than 40% of the medium-sized businesses. Conversely, businesses with more than 100 employees take much longer to search the market.

Confidence in landlord a key value driver
As the office letting market is becoming more dynamic, tenant parameters in connection with the selection of new lease premises have changed substantially as well. In the past, tenant demand was characterised by great focus on price, location and size, but today’s office tenant has a great number of additional value drivers that are key factors in the selection of new lease premises. Both indoor climate, accessibility and flexibility are high-priority concerns, and the tenants questioned in the Sadolin & Albæk tenant survey list more than seven parameters on average as key determinants of their preferred location. Somewhat surprisingly, confidence in the landlord ranks as the second-most important value driver among tenants.

Image

The emphasis on confidence in the landlord is manifesting itself in tenant buying behaviour, with recommendations from personal networks being the preferred starting point when looking for new lease premises. Via network ratings, tenants are indirectly reassured that they can trust a given landlord. This is supported by the findings of the Nielsen survey, where network ratings rank as the most reliable source of information. On the face of it, it therefore seems that general societal trends are mirrored in demand drivers among commercial tenants in search of new lease premises.

Confidence in the landlord as a value driver tallies with the relatively large proportion of businesses employing online search engines as part of their search strategy. Due to digitalisation, consumers are to a varying degree relying on online ratings in the B2C market, which is also confirmed by the Nielsen consumer survey. By employing online search engines, tenants are not only able to search the market for new premises, but may also make preliminary enquiries about a landlord. Although landlord ratings have yet to become a widespread phenomenon in the office letting market, they are common in segments of the residential rental markets, with tenants reporting and rating landlords on services such as Airbnb. Given the increasing digitalisation trend and prevalence of reporting services, it is not unlikely that this will become part of the office letting market and the commercial letting market in general. Sadolin & Albæk believes that this is a trend to monitor in future.

Does behavioural change affect vacancy rates?
The most recent vacancy figures from Danish online portal Ejendomstorvet.dk show a 6.1% decline in the Copenhagen CBD (Central Business District) office vacancy rate, marking the lowest level since mid-2009. In the span of the last 12 months alone, vacancy has seen a 1.8 bps decline, corresponding to a decline in office vacancies of almost 100,000 sqm. This trend is also confirmed by the latest market statistics released by the Danish Property Federation, measuring financial vacancy in the market (with financial vacancy defined as the sum total of current annual rent of all vacant leases divided by the sum total of current annual rent in both tenanted and vacant lease units). In the CBD, financial vacancy has dropped by 0.8 percentage point in the last 12 months, standing at 5.6% as at start-Q3 2017. In Greater Copenhagen, the pattern is the same: the vacancy rate has come down to 7.6%, but financial vacancy is calculated at 13.1%.

Image

Irrespective of the highly favourable trend in office vacancy rates, however, there are no clear indications of this being attributable to a change in the buying behaviour of commercial tenants, the relatively short decision-making process and increased digitalisation.

Market developments are largely supported by a sustained strong labour market, driving the demand for additional office workplaces, all other things being equal. In addition, conversions of office space for both residential and hotel purposes affect vacancy statistics, although the scale of these conversion schemes is difficult to gauge. However, Sadolin & Albæk believes that, due to the increased digitalisation and use of networks, it is possible to find a quicker match between a prospective tenant and landlord for their mutual benefit. All other things being equal, this makes for a more active office letting market, where trends are favourable.