The office is dead … Long live the office
Throughout the global Covid-19 pandemic, real estate news has been dominated by what it will mean for the future of offices, with media outlets speculating that occupiers will be ridding themselves of now ‘redundant’ prime real estate, keeping their workforce at home and saving money in the process.
“Bank and tech firm CEOs have set alarm bells ringing across the real estate community with headline-grabbing comments about the possibility of downsizing their offices should working from home become the post-pandemic norm, but we’ve been here before. The advent of the internet had people pondering if the traditional office was extinct - and yet, here we still are,” says Nick Deacon, Head of European Offices at Nuveen Real Estate.
Nuveen Real Estate, one of the world’s largest investment managers, believes that far from being the downfall of the office sector, the pandemic will in fact accelerate new ways of working in the traditional office space.
“Disruption has always driven evolution in the office sector, and the pandemic may finally break the binary thinking that has always frustrated change - it’s neither everyone in the office nor everyone at home. The need for companies to be nimbler post-crisis should reinforce the ongoing shift towards the core-and-flex model in which companies hold the majority of their strategic real estate – say around 70 per cent – on long leases, with the remainder on flexible, short-term leases,” added Deacon.
The firm anticipates that the most likely outcome will be nuanced and shaped by the pandemic’s influence on a host of trends that began playing out in the wake of the global financial crisis, such as increasing workplace densities, flexibility and favouring offices in well-connected, urban locations.
More recently, sustainability, wellbeing and collaborative and community workspace have also become central to many companies’ recruitment and retention strategies. These themes are likely to continue, although in the short-term at least we may see a move away from collaboration and break-out spaces as social distancing measures remain in place.
For the same reason, Nuveen notes that there will be an increased place for home working in the future. Work-from-home (WFH) would allow for increased floor space per worker without the need for costly expansion: currently the average space in the serviced office sector is 4.5 to 6 square metres, compared to 8 square metres in more typical occupancies. It would also accelerate an already prevalent trend for greater flexibility in workstyles, with WFH allowing for increased efficiency through reduced commute times.
Suburban serviced office space may also experience a revival in demand if firms decide to offer flexible office space options closer to their employees’ homes – so called ‘work close to home’, or ‘WC2H’ arrangements.
“Demand for centralised office space may reduce moderately in the longer run, with the head office focusing more on higher-value activities that foster collaboration and innovation. That means the quality of the product and service will need to be even higher than before the pandemic, so institutional landlords will also have to adapt, transforming their passive leasing practices into active engagement strategies and working closely with existing and prospective tenants,” says Deacon.
Looking more closely at serviced offices, in the short term, Nuveen Real Estate expects a major challenge for the sector as operators refit spaces to respect social distancing and also look to shed unprofitable centres. However, one possible mitigating factor is that delays in completion of new offices due to the pandemic could create opportunities for serviced-office operators to provide temporary facilities pending completion of fit outs.
“Longer term serviced office operators will need to evolve,” adds Deacon. “They will likely look to share the burdens as well as the benefits of occupancy and income volatility with building owners through new operating lease structures or management agreements, as landlords seek to reimagine their buildings while also damping some of their own risks.”