Since the Covid-19 pandemic began there have been three key impacts to office real estate. These incorporate several elements from significant deceleration in decision-making, very few people returning to offices despite restrictions lifting, and an increase in office space lease listings. For example, despite the 50% capacity that New York office buildings could reopen at and the expected 15-20% return, there was only 9% that returned to work. However it is hard to tell if these shifts in demand for office space are temporary or new trends here to stay? This article is aimed at sharing our thoughts on shifts within the market, as we see them and how they are likely to affect real estate businesses
The peaks and trough for commercial space
The major cities around the world are all wondering if they are going to experience a reduction or increase in demand for commercial space. We look at both the negative and positive angles:
- It’s going to take a significant amount of time for people to feel comfortable using public transport in urban areas
- It’s difficult to practice social distancing in elevators and other areas of office towers where there are 5,000 or more workers
- If social distancing becomes the norm, even if fewer workers are present, you might still require a similar amount of space
- There are long-established critical masses of amenities, businesses, clients, and peers that cannot be replicated elsewhere
- In-demand professionals, such as knowledge-based and skilled Millennials, find that central city areas provide the work and environment experience they desire
- If there is a significant reduction in rental fees, high-end city centre buildings become more feasible for those who found them unaffordable
When it comes to consideration for cities to overcome the challenges of the pandemic, there are two key factors to look at: The business sector’s tenant base and drivability.
Those cities heavily reliant on the sectors hit the hardest by the pandemic are going to experience greater difficulties. An example of this is the energy sector in Houston and tourism in Orlando and Las Vegas. Cities with stronger and more in-demand sectors should see fewer challenges, such as biotechnology, life science, and technology sectors in San Francisco or Toronto.
London and New York are examples of diverse and established cities that are well positioned to weather the storm. Due to a constant presence of government, cities like Washington DC are insulated.
It is likely that individuals may not wish to use public transport for the foreseeable future. This could result in those cities easily accessible by car to be more appealing than those reliant on the public transport for daily commuters. People may also gravitate toward smaller communities featuring attractive environments and lower costs.
How will the office space change?
In several countries, employers are in the infancy stages of re-entering the office and the majority of employees remain working from home. Therefore, many more phases will be required to know for sure what long term changes and requirements the office environment will need.
Reassessment could result in companies moving away from a single, city centre headquarters. An idea that’s gaining traction throughout the US is the “hub and spoke” model. This model means keeping a central headquarters and implementing smaller suburban hubs for workers. Suburban locations are beneficial because, space is cheaper, workers can move around the building, and public transportation issues are eliminated due to car use.
The increased use of flexible, drop-in spaces is highly likely, as this allows employees working from home the option to work in a facility when required. With this said, a significant number of employees will continue working form home full time where the job spec allows it. Suggesting a work from home culture is very much here to stay.
The office as we know it could be changed into a destination where people can meet, collaborate and interact, and experience the brand and culture of their employer. A possible requirement for office space in the future is therefore a space that allows more interaction and brand experience rather than traditional workspaces. Ultimately, large companies benefit from offering choice-based strategies in the workplace. One of the most significant challenges workplaces are going to face is that some people (possibly younger staff) might feel suburban offices are less attractive and even boring to work from. Consider individual employee’s needs includes reassessing lifestyles and work-life balances of your workforce.
How could you a real estate owner or investor be impacted?
As there is no one size fits all approach to the factors impacting the real estate owners and investors or a full proof guide on how they should shift their strategies, they should consider all of the factors mentioned above to formulate their own bespoke strategies to be implemented. That includes market strength, as well as the property’s age and quality. It’s clear that owners want to preserve cash flows (i.e., rental income), and tenants want to lower payments.
There’s typically a rise in “blend and extend” leases during a recession. While tenants see a drop in rent, landlords can secure longer income streams. For several years, capital placed in suburban assets has outpaced city centre property investments. Some wonder if this is going to increase if occupiers move to diversified occupational strategies. A key issue is the extent to which businesses view impacts of COVID-19 on the nature and location of work regarding short-term hiatuses or long-term occupational changes.
How will the co-working space fare?
The co-working space business model is a subcategory within office real estate that has been severely impacted by the pandemic. The collaborative nature of co-working spaces is making social distancing difficult, and the flexible contracts have led to many occupants to terminate contracts when the pandemic first started. Although there is a silver-lining for real estate owners running co-working offices in that the flexible nature of the business models also means it is easier for them to pivot towards new office space products and reinvent the ‘space as a service’ model.
The greatest issue owners and investors may face could be their desire for flexibility. Overall, we can expect occupiers to seek short-term lease commitments. That creates shorter income streams, which might have ramifications on hold periods and valuations. The immediate future might include a branched approach to investment strategies involving low-risk assets or the opportunistic purchase of discounted properties.
What is here to stay?
The impact COVID-19 has on the office sector continues to unfold. If the pandemic continues much longer, we can be sure to see these currently temporary measures become deeply engrained into office cultures. That includes meetings continuing to be held online, social distancing and working from home. If the pandemic lasts, we may also see companies implement longer-lasting changes to their professional portfolios. For example, some companies might consider short-term suburban property leases until events blow over. If they don’t, that could mean searching for longer commitments. Office sectors can adapt by further embracing two key concepts—flexibility and choice. As we noted earlier, tenants are moving toward a more geographically diverse premises strategy coupled with more flexible lease terms.
In recent years, enticing and retaining talent to your organisation by providing the best workspace experience was just as crucial as its location during property selection. Moving forward it is going to be essential to provide employees with a variety of choices regarding where and how they work while trying to give them the optimum experience.