One of the most debated topics in commercial real estate is the future of the office. What role will it play? And how will occupier requirements evolve in a post-pandemic environment?
Near-term performance linked to the economic cycle
As a result of Covid-19 and the associated lockdown measures, the trend for more flexible workplace arrangements has accelerated. We don’t expect this to reverse, even after the health crisis is over. Companies will reassess their office needs in light of more flexible working arrangements, but that is likely to be a medium- to long-term trend. Larger corporates will need time to assess their office footprint requirements.
Over the next 12-to-24 months, the economic environment is more likely to determine how offices will perform rather than flexible working arrangements. In the near-term, the concern for the office sector surrounds the more cyclical recovery in demand for office space. This is particularly relevant given the sharp and deep global recession we have witnessed in 2020, followed by a likely gradual recovery and permanent loss of output, in some markets. These effects are likely to reduce office-based jobs and create higher vacancy rates.
Flexible working arrangements are here to stay, which implies lower demand for office space
Aside from the more short-term cyclical disruption that Covid-19 has caused, it has also created longer-term structural challenges for the office sector. These challenges are not insurmountable, in our view. Structurally, there are a number of ways in which occupier behavior may change. The most important consideration is the impact of working from home. This has become the norm for the majority of office-based jobs during the pandemic. The adoption of working from home varies across regions. It is dependent on the city, cultural attitudes toward working from home — and, more importantly, apartment sizes in some locations. Nevertheless, survey data indicates that office-based employees are looking for greater flexibility in a post-Covid-19 world. The majority of employees are looking to work from home between one and two days a week.
Working from home after Covid-19
Source: Colliers, ASI, November 2020
Taken in isolation, a greater proportion of the office-based workforce is working from home. This would imply a material reduction in office occupation. One important offsetting factor could be the reversal of the long-term trend of densification. This is where office occupiers have been absorbing less space per office-based employee. Creating an optimal working environment, where wellness factors are critical in order to maximize productivity, will take precedence over squeezing in more desks. This implies that there will be more space allocated per employee, with fewer employees in the office at any given time. However, we believe that the de-densification of office space will only partially offset the impact of working from home. This trend will reduce office demand by 15-25% over the longer term. Poorer quality, less fit-for-purpose assets will bear the brunt of the falling demand.
Focus on the FACTS
The office will still function well for the vast majority of organizations, but its function will change. Companies are more likely to have a greater focus on less dense environments, with more collaborative space. This is particularly the case for service companies where idea generation, knowledge sharing and attracting talent are crucial for their businesses models. Not all office space will be fit-for-purpose to enable occupiers to achieve these future requirements. We expect that occupiers will be willing to pay more per square metre for the correct space in the future. In order to ensure that we hold or buy offices that are fit for the future, we believe that the focus should be on flexibility, amenity, connectivity, technology and sustainability (FACTS). An office that is best placed to attract and retain occupiers over the long term will have the following attributes:
- adaptable floor space
- access to local amenities
- high-quality, on-site amenities
- excellent access to major transport nodes
- already has or the ability to install smart building infrastructure
- strong environmental, social and governance (ESG) credentials
What does the office of the future look like?
For an individual, the office of the future will be digitally connected. This means individuals will book desk space, meeting rooms, exercise classes and other on-site amenities via an experience app. This will also provide touchless access into the office and enable pre-orders of coffee/food from on-site amenities. Sensors will adjust heating/cooling settings depending on the number of people in a meeting room or the wider office. The sensors will also provide updates to staff and building managers on air quality. The office will be the place of choice for learning, collaborating and socializing. It will have great facilities for all employees — both on-site and around the office.
For the company, the office will offer tenants a choice in terms of occupation. This will range from fully fitted suites or serviced areas, to conventionally presented suites for them to fit out — but with an ability to flex the area occupied over time. The building’s shared meeting rooms and great amenity offering will reduce the area required by the tenant. This makes their occupation more efficient. Most importantly, these future-fit offices will enable employees to be more productive as they work in a place that caters to their needs.
Covid-19 has acted as a catalyst to expedite trends that were in place long before the pandemic. The office as we know it today is likely to change — but with change comes potential opportunity. The increase in flexible working arrangements and a far greater focus on wellness and environmental factors pose the greatest threat for the sector. This does not mean the death of the office. But it does mean a greater diversification in future returns between offices that meet occupier needs and those that do not. Applying the FACTS to any individual office asset should help ensure that it stands the test of time.