Change is coming to the office sector in all corners of the world. But we won’t know how swift and radical the transformation will be until the dust has settled on the pandemic and workers return to their offices – or not.
Recent research, such as PwC’s June 2021 survey of major UK employers, calculates that they plan to reduce office occupancy by 9m ft2 because of increased remote working. It makes alarming reading for office investors.
Chris Valentine MRICS, head of West End office leasing at JLL in London says that even before COVID-19, a trend was becoming established which saw big occupiers taking a long lease on a highly-specified flagship building to accommodate the majority of their workforce, then making flexible short-term arrangements for the rest of their portfolio to enable them to grow or shrink their footprint swiftly in response to changing economic conditions.
Accommodating the changing style of post-pandemic working methods will further embed that approach, he believes. “We will see divergence between long-let core assets that trade at really low yields, and a more operational model of shorter-term let buildings where management is much more about creating tenant retention through service,” says Valentine. Asset managers will be under pressure to position office properties so that they fall into one of those two in-demand categories or to conclude that they are obsolete and need to be converted to another use altogether.
Meanwhile, the characteristics that attract major occupiers to a building have evolved, says Sathish Rajendren FRICS, chief operating officer for facilities and asset management services at Knight Frank in India. “Earlier the focus was always on physical assets, and now it is on human health. Wellness and sustainable building features have become more of a priority for all the stakeholders in corporate real estate.”
Lawrence Melton FRICS, CEO and president at US real estate and facilities services business, The Building People, agrees that the human factor is coming to the fore as employers and office space providers take a more sophisticated view of how to increase productivity. “If we put people in positions where they are naturally wired for success, employee retention and satisfaction will improve, and operating costs will fall. In the age of asset management, it is not just about technologies, buildings and data. It is also, most importantly, about people. For example, if I can check the air quality reading and the temperature in my office, it sends a clear message that my employer cares about a healthy, safe work environment.”
Valentine identifies the key wellbeing priorities for occupiers: health and wellbeing, sustainability and workplace technologies designed to enable connectivity outside the office and a greater sense of community and engagement within it. Within sustainability the focus is shifting away from ‘point in time’ building certifications like BREEAM towards zero carbon in use, he notes. “There is still a gap between many businesses’ zero carbon commitments and understanding how they will meet them, for many if not all. Property has a really important part to play in that.”
Providing the kind of flexible leases that many office-based businesses now demand requires a change of mindset within the property industry, says Alastair Carmichael MRICS, investment director at investor and lender HB Titan. “Investors and financiers can’t all let buildings on 15-year leases anymore, so we need to get into the detail of really understanding the tenant, and what their business plan and strategy for the future looks like. Getting to know their tenants better has paid dividends for retail landlords during the pandemic, and has led to some becoming comfortable with sharing some of the pain, and also some of the potential for the future. The balance of risk and reward in real estate is changing.”
Some property owners are taking advantage of the operational expertise of coworking and serviced office operators to provide space for occupiers seeking greater flexibility, says Jay Olshonsky FRICS, CEO at brokerage firm NAI Global. “Some shared space providers made it through the pandemic and some did not. But we will see more landlords offering coworking and shared space themselves, with providers working on their behalf rather than leasing the space from them.”
Office owners are also making increased use of data management and automation. Ritesh Sachdev MRICS, says his firm, Tata Realty and Infrastructure (the property development arm of the Indian conglomerate), at which he is head of leasing and asset management, is building an integrated command centre to manage all its assets. Data from building management systems across its portfolio will be gathered in one place for analysis. “The ability to optimise operations in a more efficient manner while reducing cost will be a big differentiator,” he predicts. “Digitalisation is the future.”
of survey respondents expect their corporation’s real estate portfolio to modestly or significantly decrease over the next 3-5 years The Future of the Office Survey, CBRE