Given the ease with which companies around the world have adapted to remote set-ups, firms may be looking at cutting their property portfolios, a move to non-core locations or to downsize.
But real estate is a long-term investment and not even the largest cost for most companies. In an increasingly service-based society, the emphasis should rather be on creating an office environment which can attract and retain talent, by offering curated experiences and flexible work arrangements.
It is unlikely the pandemic will lead firms to cut their property portfolios, says Claudio Saputelli, head of Swiss and global real estate at UBS Global Wealth Management. “Cutting property portfolios cannot be done overnight due to long-term rental contracts.”
Also, the pandemic has put all individuals in an exceptional situation, which cannot be taken as the basis for decision-making for the long term, once life has gone back to something resembling normality. “Moreover, the home-office experiment has only shown that it can somehow work for a shorter period. There are many doubts whether it will work for longer periods,” he adds.
Demand for suburban offices is unlikely to increase in the near future. What can be outsourced to near shoring sites has been already outsourced, based on rental costs and independently from any kind of crisis, believes Mr Saputelli. “Those who think that office spaces will move out from city centres clearly underestimates all the advantages city centres can offer for the daily business.”
While a central location is less important for certain functions such as administration, technology or call centres, this does not take away demand for a central office setting, given the need for employees to interact with clients, and to collaborate to produce best results for their employers, says Bill Nimmo, head of real estate asset management at Wells Fargo Private Bank in the US.
“Suburban offices may get a short-term lift, but once Covid passes, companies and workers will still want to be in downtown/central business district locations,” predicts Mr Nimmo, expecting demand for shared office space to continue in both suburban and downtown locations.
In a recent global survey of CBRE corporate clients, less than one in 10 said they were considering moving away from high density urban core locations. “Large organisations will likely keep a core office front in major cities, while also adopting smaller offices in the suburbs to meet continued remote working needs,” believes Manish Kashyap, head of advisory and transaction services, Asia-Pacific and global head of advisory and transaction services, Agile, at CBRE.
These decentralised offices are beneficial to both the company and employees by allowing employees greater choice over their work schedule, reducing overhead costs and cutting down on commutes.
“Offices will serve as a place to enhance the working experience and increase productivity,” says Mr Kashyap. In the long term, companies will need to offer hybrid work models, enabling employees to work in a diverse range of locations, be it home or other remote location, in a satellite office, or the central office, which facilitates collaboration and a sense of belonging. “As companies navigate the uncertainties of this new era, they will need to incorporate flexibility into every aspect of their business and learn to be responsive to the fluidity of employee needs.”
The outbreak will lead to a stronger preference for wellness and sustainability features, including LEED certification, natural lighting, and efficient use of energy, according to 44 per cent of the respondents to CBRE’s recent Asia-Pacific Occupier Survey. The focus will not be on cost cutting, but sustainability and agility.
Coworking and serviced offices could also play a big role in a company’s business continuity plan. “Many inquiries into alternative workspace solutions in China, Hong Kong and Singapore have come from large occupiers who are looking for flexibility in work arrangements and lower financial risk, such as no capital outlay for space build out and short lease term,” reports Mr Kashyap. Despite offices being vacant for the past few months, causing the flexible workspace industry to take a hit, the sector will come out stronger than before in the long-term, he predicts.
The role of landlords is also evolving. “Prior to the outbreak of Covid-19, we already saw a deepening of the traditional landlord-occupier relationship. Landlords should capitalise on the shift to flexibility and create a blended space offering at the building and portfolio levels, as well as differentiate buildings by offering curated experiences.”
In addition to parking spaces and food and beverage offerings, occupiers are increasingly demanding conference and meeting management services, gym and fitness spaces, and other wellness amenities. “As landlords start delivering more complete solutions, building values will be determined not just by the cash flow of rent but also cash flow from services,” concludes Mr Kashyap.
Retaining talent
Cost saving is secondary when it comes to investing in an office, notes Jason Baggaley, fund manager, real estate at Standard Life Aberdeen in the UK. “We have seen a move towards people taking the best quality, slightly less of it, but not necessarily cutting their occupational cost that much.”
Core locations remain attractive to retain talent, which explains why most businesses are based in the centre of towns, so that people can easily commute in from 360 degrees around it.
Also, people, not real estate, are the biggest cost for most companies. “If you cut your property cost by 10 per cent, by reducing space, the overall impact on your bottom line is not nearly as great as being able to increase productivity by 5 per cent. Creating the type of space and the type of environment where people can work best is what drives a company’s performance, not necessarily just reducing a bit of scrape footage,” adds Mr Baggaley.
If companies will offer more flexibility in work arrangements to their employees, they will require greater flexibility from landlords too. A core and flex approach will become more popular, where tenants take a long lease for the core space in a building, which they occupy the whole time, while using the flex space to meet their needs, for example when they are in growth mode. This can be achieved through a serviced office on a weekly or monthly basis, or shorter lease.
The need for physical distancing imposed by the pandemic has also called into question the traditional concept of forcing thousands of employees in one building, one location and one city. In April Barclays’ CEO Jes Staley said that “the notion of putting 7000 people in a building may be a thing of the past”.
“Although the need for physical distancing is a short term consideration, it is going to allow businesses to think about the management of their risk, of their employees, and how best they want to do it in the new world,” says James Maydew, global head of listed real estate at AMP Capital, the Australia-headquartered global investment manager. “This probably requires them to have a more diverse set of options for their talent base, as opposed to one mega office building in a downtown city.”
Companies do not have control over infection risks associated with commuting, which points to less demand in city centres. Decentralising the talent base into several different locations is a more logical approach, adds Mr Maydew.
However, the office remains very important for building a corporate culture, a brand, for building a business and bouncing ideas off each other, particularly in creative sectors. This is very difficult to do remotely.
Post-Covid, the office space will have changed and evolved, and will have less desks and more creative break out spaces dedicated to sharing ideas. “As we move from being a world based on creating and building things to one that is based upon services, meeting talent’s needs will become even more important,” says Mr Maydew.
A generic office building in a city centre may be a risky investment today. Current high prices of office transactions in major city centres are not supported by the current cycle level – this being the end of the office cycle – and the structural shift toward flexibility. This shift is being accelerated by the pandemic and is likely to take out the incremental demand for the office market in the coming years.
Especially in capitals such as London, New York, Hong Kong or Tokyo, where commuting times are very long, office environments need to offer attractive experiences and events that can justify employees’ commuting to their workplace.
“I do think the future of the mega city in the developed world, is going to be brought into question in the coming years. I would be looking to have exposure to office markets in cities that are not regarded as being gateways, cities that are cheaper, which offer a better standard of living, a high quality of life, but also have got access to a growing talent pool, perhaps in proximity to some very well-regarded universities.”
Stronger immunity
Buildings will be much healthier environments in the future, and temperature screening, plus enhanced cleaning of offices are expected to be part of the ‘new normal’.
Just as we strengthen our immune system, so we should strengthen the immunity of our buildings by rethinking how they are designed, constructed, maintained and run, believes Liviu Tudor, founder and president of European property company Genesis Property, and president of European Property Federation. Leveraging a team of 20 experts from the health, technology, real estate, architectural and engineering sectors, Mr Tudor pioneered the Immune Building Standard, which certifies the immunity level of a building to a pandemic or similar threat, based on more than 100 criteria.
Safety measures, such as physical distancing and temperature checks at entrances, do not allow for firms to operate at pre-Covid staffing levels, observes Mr Tudor. Buildings will have to be re-engineered to newer post-Covid standards that implement structural and technological changes, including hospital grade air-filtration systems, AI technologies and facilities management. Among other features, the workplace of the future should include an immune quarantine room, an immune warehouse, immune stewards to implement and monitor measures and digital screens in reception to display immunity-boosting indicators.
Genesis property, which owns and manages office buildings for multinationals such as Société Générale and Siemens, has started testing these criteria within its own headquarters in Bucharest, with the plan of rolling them to other properties in Europe.
“This is a landlord job, if landlords want tenants and employees to come back to the office,” says Mr Tudor. “Right now, fear is the name of the game, and we have to fight that fear to show employees that their offices will be safer than their homes.”
In the same way a firefighting system is compulsory for any building, these types of standards will soon become mandatory by law, hopes Mr Tudor. “This investment will pay off in the long term. As landlords, you can show to your tenants that you have already invested into this kind of measures. It is a business opportunity for them to show they care.”
In the future, there will be more flexibility in the workplace, but companies cannot build a real corporate culture if people work remotely, he says. “Offices will not disappear. Being in an office is something more than working. It is about bonding, it is about communities and building a team, because a team is about creating energy.”
The pandemic has accelerated some workplace trends, already in place before the crisis. “The new game for offices is around creating experiences. We need to put a new soul into the offices, and find new ways of attracting and retaining talent.”
The office will have to be a “content factory,” supported by the latest technology, such as virtual reality and artificial intelligence. Every office should have a sort of conference centre, with daily events listed on the employees’ app. Firms will have to compete on developing a technology-driven culture to attract talent.
The office is especially important for developing younger generations, the digital natives, as technology makes them lonely. “The job of a company is to develop its people. And younger generations love new trends. The future of the office is about developing new trends and new content,” concludes Mr Tudor.
