How to Space Plan for a Demand-Driven Portfolio

Flexible work models have benefited both companies and employees throughout the pandemic, allowing businesses to keep running and people to keep their jobs. Now, however, corporate real estate leaders are grappling with how to permanently build flexibility into their space planning and portfolio strategy.

Today, employees have more flexibility than ever. However, this poses challenges for corporate real estate leaders who must anticipate—and develop a real estate strategy around—when employees are going to show up for in-office work. But if you think that managing flexibility is untenable, returning to pre-pandemic work models is even more so. Employers have little choice; we are going to provide our employees with far more flexibility than in years past.

Managing a portfolio that provides the maximum amount of flexibility to employees sounds daunting. But just as work models have changed, portfolio optimization must also evolve. In a supply-driven portfolio, our typical approach is to plan, then act, but business has moved away from a “plan, then act” world to a world of act, then optimize.

To better understand demand-driven portfolios, we can apply three concepts from the software world: agility, user experience and modularity.  

Agility

There is an old saying in software design: “Premature optimization is the root of all evil.” The real estate industry could benefit from this adage. Occupiers create risk when they try to create efficiency without understanding its necessity. In real estate, our analogue is the long-term lease. We make long-term commitments and spend enormous amounts of capital, ignoring uncertainty, to reduce the cost per square foot today.

The results are predictable. The average corporate real estate portfolio is 35% vacant, without even taking seat-sharing into consideration.

When making “just-in-case” decisions, our only recourse for not knowing the future is overbuying. When first trying a product, consumers don’t buy a wholesale quantity or subscribe to have the product delivered every month. They purchase a smaller amount to try out the product and see if they like and use it. Real estate decision makers have not had a similar luxury until the advent of flexible space.

For example, if a business unit seeks space for 200 people who only come to the office occasionally, the typical real estate response would be to find a space that accommodates 200 people with room for growth. If assumptions are wrong, not much can be done once the lease is signed. In demand-driven portfolios, space occupancy proceeds in stages to ensure commitment is driven by demonstrable need rather than potential demand.

If the business has plans for 200 employees, but currently has just 15, it makes more sense to give each person an on-demand access pass, enabling them to book conference rooms and workspaces as needed. If each employee made a reservation every day, it would be more expensive than a traditional lease, but far less expensive than a traditional lease sized to 200 employees. A long-term lease remains a future option should demand require.

Three months into our hypothetical example, the number of people has grown to 35, and they are coming in 30% of the time. There are 10 people in the office on average, sometimes up to 15. We shift the company to a 12-desk private suite that everyone in the 35-person group can access, to be a “home base” for the group. If more people show up, they just grab space on-demand. While we can maintain that month to month, we soon realize that because the group is growing, we should take advantage of a slightly longer three-month term discount on a 15-seat space.

Continuing our example, let’s say the business unit’s growth stalled at 100 people after 18 months, and those employees only come in 30% of the time. With lower-than-anticipated hiring, the business could take out a five-year lease on 45 seats of space and co-locate with a flexible provider to give employees access to amenities like training areas or large conference rooms.

This is what demand-driven real estate looks like, and one could use a very different example and still come to similar conclusions. If headcount had grown by more than 200 or if people came in more than anticipated, the demand-driven approach would still be better than trying to predict the future. In fact, the only scenario where the traditional approach beats the demand-driven approach is when what we expect to happen happens exactly as predicted. In the modern business environment, having a plan that requires accurate predictions to succeed is just planning to fail.

User Experience

With software, great technology is built not by describing features, but by understanding people and solving their problems. A user experience (UX) flow describes the individual experience of moving through an application—a series of screens or actions driven by user needs or demands. If the user stays in the application longer or gets to the desired end state faster, the UX has been improved. 

Real estate leaders need to adopt the same viewpoint toward their office: if people come back, they find it valuable, which is good. By setting real estate goals with intangibles like culture, productivity or delight, real estate organizations have lost focus on the employee experience. Organizations consistently create policies and rules around attendance that begin with a simple and pervasive view: if given the choice to do their work from wherever is best for themselves and their teams, most employees would make the wrong choice for the organization. Given that the deeply held belief that most organizations could not function digitally turned out to be nonsense, it is worth examining why companies feel compelled to compel attendance.

By freeing employees to vote with their feet, utilization becomes a clear metric of success—a person’s willingness to commute to an office is indicative of a quality workplace experience. It’s clear that engaged employees would like to be more productive, and most likely have a better understanding of their personal productivity than an outside observer. Forcing unengaged employees into the office for no discernible reason is unlikely to fill them with esprit de corps. Although utilization with autonomy doesn’t encompass everything we want from the office, utilization without autonomy almost certainly works against everyone’s goals. The competitive tension created by allowing freedom of choice will drive a better office experience, or at worst, require less office space. 

For utilization to take such a central role, it must be examined constantly. The workplace is often measured only through periodic workplace strategy sessions or wiring premier sites with sensors and other technology. Unfortunately, these measurements lack the context of a variety of possible conditions; they don’t tell us what to improve or change. The minimum viable demand-driven portfolio begins with frequently measured utilization data. The cost of investing in the systems needed to achieve this is not trivial, but neither is the ROI. 

While all this improved UX sounds great, a real estate decision maker might think that it also sounds very expensive, something for advanced organizations that don’t think about cost. Nothing could be further from the truth. Demand-driven portfolios will be much less expensive than supply-driven portfolios because they will have a much better match between supply and demand. A demand-driven portfolio will have a higher cost per square foot but fewer square feet. We can remove the unnecessary vacant space to engineer a better, less-expensive office.

Modularity

Modularity makes each component function independently, interacting with other components without needing to know how they work. In the software industry, modularity allows a programmer to replace the front-end of a product without needing to adjust the back-end and vice versa. To make something modular, it is broken down into components and then an interface is designed to connect them. In real estate, our components are users, spaces and decision makers. Users utilize spaces, but they have to know where the office is, what spaces are available, where they can sit and what areas are off limits. This breaks the principle of modularity because the user must know how the product works to use it.

Users should engage with a product in a way that adapts to their needs. Usually, people know who they need to meet with or the activity they’d like to perform. By providing a system that shows spaces to a user based on those needs, we can change those options rapidly. Instead of expecting people to learn about their options beforehand, we can try new layouts, locations and amenities, without a negative impact on the user experience.

The future real estate decision maker is driven by results, specifically around utilization and cost, remaining agile, paying attention to user behavior and maintaining simple systems. If they can deliver something that gets more people to utilize a space for the same cost, they have succeeded. Each change is treated as an experiment, something to be tested, monitored and scaled up or down based on outcomes. In other words, the demand-driven portfolio doesn’t require workplace strategists—it needs workplace scientists.

While this article presents demand-driven portfolios as one option among many, this perception isn’t entirely accurate. Employers who want to attract and retain their best talent must address employees’ desire for flexibility. As a result, the future real estate portfolio may look less like a symphony and more like a dance floor: if real estate leaders can no longer conduct the orchestra, perhaps they can still DJ the party.