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What’s the future of the office post Covid?

10 December 2020

David Scott, Senior Real Estate Investment Analyst (UK) and Jason Baggaley, Deputy Head of Value Add Real Estate Funds examine a key question for many businesses and workers post Covid, what will the office environment look like after the pandemic is over?

One of the most hotly debated topics in commercial real estate globally is the future of the office, the role it will play, and how occupier requirements will evolve in a post-pandemic environment. As a result of Covid-19 and the associated lockdown measures, the trend of more flexible workplace arrangements has accelerated and we don’t expect this trend to be reversed even after the pandemic is over.

Whilst companies will inevitably reassess their office spatial needs in light of more flexible work arrangements, it is likely that this will be a medium to long term trend, particularly given the time required for larger corporates to comprehensively assess their office footprint requirements. In the next 12 to 24 months however, the performance of any given office market is likely to be determined by the economic environment, rather than the structural challenges associated with more flexible working arrangements.

With the sharp and deep global recession we have witnessed in 2020, followed by an expected gradual recovery and permanent loss of output thereafter in some markets, the concern for the office sector in the near-term surrounds the more cyclical recovery in demand for office space. This will be intrinsically linked to the likelihood of a reduction in office-based jobs and associated higher vacancy rates.

Longer term challenges

Aside from the more short-term cyclical disruption that Covid-19 has created, it has also developed longer term structural challenges for the office sector, which in our view are not unsurmountable. Structurally, there are a number of ways in which occupier behavior may change. The most important consideration is the impact of increased working from home, where it has become the norm for the majority of office-based jobs globally during the pandemic. The adoption of working from home varies markedly across regions and is highly dependent on the city, cultural attitudes towards working from home and more importantly in some locations, apartment sizes. Nevertheless, survey data indicates that globally, office-based employees are looking for greater flexibility in a post-Covid world, with the majority of employees looking to work from home between 1-2 days a week.

Wellness factors

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 maximising 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 de-densification will only partially offset the impact of working from home, leading to a reduction in office demand of between 15-25% over the longer term, with poorer quality, less fit for purpose assets bearing the brunt of a reduction in demand.

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; particularly companies operating in service sectors 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 to occupiers to achieve these future requirements and it is expected that occupiers will be willing to pay more per square metre for the correct space going forward. Holding or buying offices that are fit for the future means increased focus on flexibility, amenity, connectivity, technology and sustainability (FACTS). An office which possesses floor space that is adaptable, has access to local amenities as well as high quality on site amenities, excellent access to major transport nodes, already has or the ability to install smart building infrastructure and strong ESG credentials will be best placed to attract and retain occupiers over the longer term.

It’s no doubt that 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 opportunity. The increase in flexible working arrangements and a far greater focus on wellness and environmental factors undoubtedly 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.

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