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The office is dead. Long live the office!
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 now that working from home has become the post-pandemic norm for many.
The office sector has been able to shake off previous work-from-home (WFH) threats, but this pandemic creates a new set of challenges, given the widespread nature of the WFH experiment coupled with better technology. History tells us that the social nature of humans’ need to interact, recruit, innovate and collaborate has outweighed the benefits of “hot desking,” telecommuting and other remote-work schemes. Yet we still have to ask: Is this time different?
Who needs an office anyway?
We expect considerable differences in opinion about the best workplace solutions. But as corporate leaders continuously assess what is and isn’t working through the crisis, they cite experiences that suggest they will not abandon the office en masse: communications technologies that aren’t up to the job, loss of competitive edge, and younger or newer employees unable to learn from experienced colleagues or contribute meaningfully to meetings or projects.
Due to the social distancing measures expected in the workplace after the transition from lockdown, companies may look to permanently reduce workplace densities, reversing that long-running trend.
Work-from-home would allow for increased floor space per worker without the need for costly expansion. It would also accelerate an already prevalent trend for greater flexibility in work styles. Even firms that value face time may come to appreciate that WFH can increase efficiency by reducing commute times.
So while companies will return to the office, we’re likely to see more WFH, too.
After analyzing the effects of the pandemic on these trends, Nuveen's real estate experts see four key outcomes:
- Overall demand for office space shouldn’t be affected dramatically, but could reduce moderately as companies restructure their portfolios and accommodate greater workplace flexibility.
- Demand for supplementary flexible space is expected to rise, but flexible operators will need to evolve their business models. Industry consolidation may occur, and the shift away from coworking to flexible space is a material transition.
- Landlords, property managers and tenants will form closer alliances to enhance the experience and value of the office; they’ll explore new services for tenants with associated income streams for landlords, reinforcing the migration to a partnership model.
- ‘Active animation’ will drive workplace evolution, with an enhanced focus on collaboration, community, hospitality, health and wellbeing.
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 future of flexible space
Clearly the pandemic will significantly impact the serviced office market.
In the past few years, operators offered highly creative and interactive communities for their member tenants and drove their profitability through smart densification of desk space around communal areas.
In the short term, we expect a major challenge for the sector. Operators will look to shed unprofitable centers, as well as refit spaces to respect social distancing. Researchers have found that open office floor plans increase the spread of illness among workers relative to lower density layouts.
The space allotted per office worker has been falling for years. But we expect that trend to reverse, with floorspace per worker rising in years ahead. One possible mitigating factor: Delays in completion of new offices due to the pandemic could create opportunity for serviced - office operators to provide temporary facilities pending completion of fit-outs.
Longer term, however, operators will need to evolve. They’ll look to share both the burdens and benefits of occupancy and income volatility with building owners through new operating lease structures or management agreements. Landlords will seek to reimagine their buildings while also damping some of their own risks.
Corporate demand will still come from firms that seek to actively use the serviced office market to satisfy their flexible space quotas, but operators may not be able to shoulder all of the new and increased costs of smart densification in a post-pandemic world. We expect a higher number of conventional property owners to play a greater part in satisfying the demand for flexible space.
The great accelerator
Agility has proved to be key to navigating a crisis — property, working practices, redirecting resources, adapting sales strategies.
The need for companies to be nimbler should reinforce the ongoing shift toward the core-and-flex model in which companies hold the majority of their strategic real estate — we estimate around 70% — on long leases, with the remainder more flexible and short-term.
Demand for centralized 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. Institutional landlords will also have to adapt, transforming their passive leasing practices into active engagement strategies and working closely with existing and prospective tenants.
While all of this may reduce demand for core space, the impact will be spread over future lease events and is unlikely to create significant market disequilibrium at any one time.
And as it transforms to accommodate lower densities, flexible office space will benefit over time.
Finally, suburban, serviced office space may also experience a revival in demand, particularly if firms decide to offer flexible office space options closer to their employees’ homes — so called “work close to home”, or WC2H arrangements.
The pandemic will impact ongoing trends that in turn will affect demand for the types and quantity of real estate. All of this will reinforce the value of the office as a strategic resource and ultimately underpin healthy long-term demand for space.
In this issue
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A word on risk
Real estate investments are subject to various risks, including fluctuations in property values, higher expenses or lower income than expected, and potential environmental problems and liability. Please consider all risks carefully prior to investing in any particular strategy. A portfolio’s concentration in the real estate sector makes it subject to greater risk and volatility than other portfolios that are more diversified and its value may be substantially affected by economic events in the real estate industry. International investing involves risks, including risks related to foreign currency, limited liquidity particularly where the underlying asset comprises real estate, less government regulation in some jurisdictions, and the possibility of substantial volatility due to adverse political, economic or other developments.
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This information does not constitute investment research as defined under MiFID.