A model for the modern workplace

Dubai is synonymous with innovation and growth. Among its many achievements is the development of a thriving freehold real estate market, including high-rise office buildings, some of which have been subdivided and managed like condominiums. Each office space is owned individually, but the building’s common areas are managed and maintained collectively by an association or, as in the case of Dubai, a management entity. Unlike the norm in commercial real estate, where tenants pay the service charge, the owners pay this charge in the form of assessments. When I started managing these developments 15 years ago, I initially wondered how the strategic management needs of these freehold commercial properties would differ from residential condominiums. Despite regulations being the same for all condominiums—whether residential, commercial, or mixed-use—I sensed something was missing.

To better understand the subject, I spoke with real estate experts from around the world. Ramón Venero, CPM®, an IREM instructor with decades of experience managing commercial real estate in the U.S. and Europe, explained that in Spain, office condominiums exist, particularly in urban areas like Madrid and Barcelona. However, the trend is toward privately owned office buildings due to a preference for larger, cohesive office spaces that can be more easily managed and tailored to business needs. He also noted a recent wave of converting office buildings to residential use due to high office vacancy rates and increased demand for economical housing.

Reflecting on Dubai’s market over the past decade and a half, the idea of repurposing office buildings or some units for residential use has crossed the minds of many, though the commercial property market in Dubai has rebounded well post-COVID.

In Brazil, office condominiums are popular in major cities such as São Paulo and Rio de Janeiro. They appeal to small and medium-sized businesses that prefer the flexibility of owning their office space within a managed building environment. This provides them freedom from rent uncertainty while offering opportunities for capital appreciation. (See “São Paulo’s vertical villages” in the March/April 2024 JPM.)

Nevertheless, larger corporations, like those in Spain, often opt for privately owned office buildings for greater control and space flexibility. My experience in Dubai mirrors this trend, where office condominium ownership is more suited for—and sometimes preferred by—small and medium-sized businesses. However, in reality, there are more investor-owners seeking rental income than small businesses occupying the properties themselves.

An incident that emphasized the limitations of space flexibility in office condominiums involved a corporate events company with over 300 employees scattered across different offices on various floors of a building. They were running out of space and found it challenging to find additional space in the same building or district. Imagine dealing with dozens of landlords and property managers, and different lease terms, rent dates, and renewal dates. In another case,

I was approached by two reputable brokerage firms looking for 3,000 square feet of office space for their international client. Despite being in the market for several months, the client struggled to find a contiguous space of that size due to the fragmentation of available space.

Renee Savage, CPM®, CCIM, 2024 IREM Immediate Past President and president, SavageCRE, Inc., highlighted that office condominiums in the U.S. face similar challenges. She noted that the strata title ownership model is not commonly used for high-performing commercial properties. Instead, the dominant model in the U.S. is single ownership, where one entity owns and manages the entire property, ensuring a more cohesive management strategy.

Poh Sian Teo, a prominent real estate expert from Singapore, echoed these sentiments. He noted that the strata title structure is neither practical nor feasible for commercial properties in Singapore. The country has moved away from this model, favoring a system where commercial properties are owned by developers and managed to meet the growing demands of the commercial real estate market. He emphasized that without such innovation, these commercial developments risk becoming less desirable, losing their value, and entering a vicious cycle of decline.

These discussions and the challenges with the office condominium model I’ve witnessed in my career have led me to believe that it’s time to rethink the model. This is necessary to meet the expectations of the modern workforce and provide consistent, quality management services in these properties. The drawbacks to the current office condominium model and the alternative models I propose apply to most markets.

Drawbacks of condominium ownership structure for office buildings

Each unit in a condominium model is individually owned, and the management responsibilities for common areas, facilities, and elements are assigned to a management company. While this model provides a degree of autonomy to owners, it also presents several challenges:

• Limited flexibility in space allocation: Each individual office owner manages their own unit, leading to no strategic space allocation for growing companies. This arrangement can be particularly problematic for businesses that experience growth. They often find it challenging to consolidate into a larger, contiguous office within the same building, disrupting business continuity and forcing them to seek space elsewhere with more strategic flexibility. As Savage observed, commercial properties with fragmented ownership can struggle to meet the space needs of growing companies, making it difficult for them to expand within the same property.
• Inconsistent management quality: With multiple owners involved, the quality of property management can vary significantly. This inconsistency stems from the fact that individual owners can have different goals, ranging from capital appreciation, where they prioritize tenant quality and demand higher rents, to seeking periodic returns with less focus on tenant quality and accepting lower rents to reduce vacancy losses. Some owners may prioritize cost-saving measures that compromise the overall upkeep and quality of the property, while others may want to invest more heavily in maintenance and amenities. However, in a typical condominium management environment, whether residential or commercial, service charges are often viewed as a cost, leading to constant pressure to reduce expenses. This results in commercial properties that fail to meet the evolving expectations of today’s workforce, who increasingly value workplaces that offer a comprehensive experience, including high-quality amenities, facilities, and a sense of community.
• Variable occupancy rates: Individual owners may have different strategies and resources for attracting tenants, resulting in fluctuating occupancy rates. This lack of a coordinated strategy often leads to a haphazard tenant mix, which can be detrimental to the overall appeal of the property. For instance, in the same building, you might find a dental clinic next to a dance studio, a tutoring center with high foot traffic of young, loud, and happy people on one floor, adjacent to a quiet corporate head office. This eclectic mix can disrupt the synergy that a more thoughtfully curated tenant composition would bring. A professional management company can strategically select tenants to create a harmonious environment that enhances the overall experience for all occupants. By fostering a balanced mix of complementary businesses, such as aligning wellness services or grouping creative industries, the property can become more attractive to potential tenants and clients, leading to higher and more stable occupancy rates.
• Parking management: Another challenge in the current condominium model is the management of parking spaces. Each unit typically comes with its own dedicated parking, and the number of parking bays is fixed, leaving no flexibility for tenants who may need more parking. Mismanagement of parking can significantly impact tenant satisfaction. A unified management approach can ensure efficient allocation and maintenance of parking facilities, providing an essential service that individual owners might struggle to manage effectively.

Alternative management models

In light of these challenges, exploring alternative management models for office condominiums becomes imperative. One such model is the traditional sublease approach, where a master leaseholder subleases spaces to various tenants. While this model offers centralized management and strategic tenant selection, it falls short in providing the cohesive experience and high standards that modern commercial tenants expect. For instance, WeWork has taken this model a step further by creating vibrant, flexible work environments that align with contemporary office space expectations. However, this model still relies on subleasing from individual owners, which can limit flexibility and lead to potential conflicts between subtenants and the master leaseholder.

A more integrated approach is the condo/community manager model, where a skilled manager oversees leasing and ensures a strategic approach to tenant mix and space allocation. This model offers better coordination and strategic leasing compared to traditional condominium management, but it still lacks the comprehensive oversight needed to fully optimize a commercial property’s potential.

Hotel apartment model

An innovative solution to these challenges could be the hotel apartment model, where all units are pooled under a single management company, similar to how hotel apartments are managed. This approach ensures consistent quality, optimized occupancy rates, and flexible space allocation, addressing many of the issues inherent in the traditional condominium model.

In a hotel apartment model, a professional management company oversees the entire property as a unified entity. This company is responsible for all aspects of property management, including leasing, maintenance, and tenant relations. Here’s how it can transform the management of office condominiums:

1. Consistent quality and service standards: By centralizing management under a single entity, the hotel apartment model ensures that maintenance and service standards are consistently high across the entire property. This uniformity addresses the fragmented management quality often seen in condominium models. It also allows for the provision of high-quality amenities and facilities that meet the modern workforce’s expectations for comprehensive workplace experiences.

2. Optimized occupancy rates: A professional management company can implement comprehensive marketing and leasing strategies to attract a diverse range of tenants.

By strategically selecting tenants and creating a balanced mix of complementary businesses, the management company can enhance the property’s appeal, leading to higher and more stable occupancy rates. This coordinated approach helps avoid the haphazard tenant mix that often plagues condominium-style properties.

3. Flexible space allocation: The hotel apartment model allows for greater flexibility in space allocation. Instead of individual owners managing their own units, the management company can reconfigure spaces with more universal fit-outs and modular layouts to meet the needs of different tenants, accommodating growing businesses and changing space requirements more effectively. This flexibility is crucial for companies looking to expand without having to relocate, as it provides a more seamless and integrated approach to space management.

4. Improved parking management: By managing parking spaces as a pooled resource, the management company can allocate parking more efficiently, ensuring that tenants have access to the parking they need. This approach addresses a significant challenge of the condominium model, where parking is often rigidly allocated and difficult to manage effectively.

5. Enhanced tenant satisfaction: The hotel apartment model, with its consistent quality and flexible space options, creates a more attractive and satisfying environment for tenants. This approach helps retain tenants, reduce turnover, and foster long-term relationships, ultimately contributing to the property’s success and stability.

Adopting the hotel apartment model for freehold office condominiums could prove highly beneficial:

• Increased investor returns: By optimizing occupancy and rental rates, professional management companies can ensure higher and more stable returns for investors, making the property more attractive as an investment.
• Enhanced tenant satisfaction: Consistent quality and flexible space options make properties more appealing to tenants, improving retention rates and fostering a sense of community and satisfaction.
• Economic growth: By creating more attractive commercial spaces, many cities can appeal to a broader range of businesses, contributing to economic growth and diversification.

Venero highlighted that in investment or leisure markets like Dubai, the “high touch, high feel” model of hotel apartment management can be very appealing to unit owners and tenants. However, transitioning to this model requires careful consideration of governing documents (bylaws) and convincing unit owners of the benefits through compelling financial, marketing, and expertise arguments.

Savage also noted that a key challenge would be getting owners to agree on the profit distribution mechanism. The model would need to establish profit entitlements similar to service charges, but for rental income, with additional shares for units with better views and higher floors.

The time is ripe for reimagining the management of freehold office condominiums. By transitioning from a condominium-style approach to the hotel apartment model, new opportunities can be unlocked for investors and tenants alike. This model not only addresses the limitations of the current system but also aligns with the evolving needs of modern businesses, ensuring high-potential office buildings with condominium ownership remain competitive to meet the demands of the modern workplace.