European offices: are they fit for the digital evolution?

Craig Wright, Head of European Real Estate Investment Research; and David Scott, Senior Real Estate Investment Analyst

Covid-19 has acted as a catalyst to expedite trends that were in place long before the pandemic emerged. Hybrid working arrangements and the digitalisation of working practices were already adopted by many organisations, in some cases for several decades. Material technological advances over the last five years have enabled us all to embrace more agile working, while retaining significant levels of connectivity and productivity outside of the office.

Flexible working and office requirements

As a result of Covid-19 and the associated lockdown measures, the trend for more flexible workplace arrangements has accelerated. We do not expect this to be fully reversed even after the health crisis is over. While companies will inevitably reassess their need for office space in light of more flexible working arrangements, it is likely that this will be a medium- to long-term trend. Larger companies will need time to comprehensively assess their office footprint requirements.

Survey data indicates that office-based employees are looking for greater flexibility in a post-pandemic world. The majority of employees are looking to work from home two-to-three days a week, implying that hybrid working arrangements are here to stay. Cost pressures and efficiency savings mean that many companies will welcome a reduced level of office dependency.

Taken in isolation, a greater proportion of the office-based workforce working from home would imply a material reduction in office occupation. One potentially important offsetting factor will be the reversal of the long-term trend of densification, 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 maximise 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. We believe that de-densification of office space will only partially offset the impact of working from home, leading to a reduction in office demand of between 15-20% over the longer term in some markets. Poorer-quality, less fit-for-purpose assets in weaker locations will bear the brunt of the falling demand. Interestingly, it could also lead to increased competition for those buildings that tick all of the boxes for occupiers.

The focus on FACTS

The office will still serve an important function for the vast majority of organisations, but undoubtedly the function it serves 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 companies operating in service sectors where idea generation, knowledge sharing, and attracting and training talent are crucial for their business models. Not all office space will be fit for purpose to enable occupiers to achieve these future requirements, and we expect that occupiers will be willing to pay a relatively higher rent per square metre for the correct space in the future.

Survey data indicates that office-based employees are looking for greater flexibility in a post-pandemic world

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). Offices that have the following features will be best placed to attract and retain occupiers over the longer term: adaptable floor space; immediate access to local amenities; high-quality onsite amenities; excellent access to major transport nodes; already has, or the ability to install, smart-building infrastructure; and, critically, strong environmental, social and governance (ESG) credentials.

The office of the future

The differences will be immediately obvious when entering fit-for-future offices. Employees, their guests, or their clients will be greeted by spacious and well-designed lobby areas. These will offer more accessible facilities and the ability to connect physically and digitally with the areas of the building they need to access. Lift provision will be materially higher than before, while adjoining passages and other ancillary areas will need to offer greater space for people to move and circulate through the building safely.

Without compromise, the highest energy efficiency and overall ESG criteria will be critical for tenants and investors. However, perhaps the greatest requirements for future offices might not be visible at all: to be fully digitally connected. This means desk space, meeting rooms, exercise classes and other onsite amenities will be booked via an experiences app. This will also provide touchless access into the office and enable staff to pre-order coffee and food from onsite facilities. Sensors will adjust heating and cooling settings, depending on the number of people in a meeting room or the wider office. They will also provide updates to staff and building managers about air quality. In short, the office will be the place of choice for learning, collaborating and socialising, with great facilities for all employees – both onsite and around the office.

This is the first in a series of papers where we look at the future of offices.

RISK WARNING

The value of investments, and the income from them, can go down as well as up and you may get back less than the amount invested.

The views and conclusions expressed in this communication are for general interest only and should not be taken as investment advice or as an invitation to purchase or sell any specific security.

Any data contained herein which is attributed to a third party ("Third Party Data") is the property of (a) third party supplier(s) (the "Owner") and is licensed for use by Standard Life Aberdeen**. Third Party Data may not be copied or distributed. Third Party Data is provided "as is" and is not warranted to be accurate, complete or timely.

To the extent permitted by applicable law, none of the Owner, Standard Life Aberdeen** or any other third party (including any third party involved in providing and/or compiling Third Party Data) shall have any liability for Third Party Data or for any use made of Third Party Data. Past performance is no guarantee of future results. Neither the Owner nor any other third party sponsors, endorses or promotes the fund or product to which Third Party Data relates.

**Standard Life Aberdeen means the relevant member of Standard Life Aberdeen group, being Standard Life Aberdeen plc together with its subsidiaries, subsidiary undertakings and associated companies (whether direct or indirect) from time to time.