Mid-December is when the Oxford English Dictionary announces its word of the year. It’s celebrated by lexicographers and logophiles alike. But as 2020 was unprecedented in so many ways, the judges at the OED had a difficult time settling on just one word. So instead, they decided to report more expansively on the breadth of language change during the year. The English language, like all of us, has had to adapt rapidly and repeatedly. Some of the newly popularised terms found a place in this blog over the past 12 months: anthropause, unmute, Zoom fatigue (it’s real), and of course WFH.
Indeed, WFH has become part of the property vernacular. This is not only because so many of us continue to do so but also fears of its potential lasting impact on a very large office sector. The OED’s chronicling of WFH coincides with the release of the latest whitepaper from our Real Assets Research team: The Evolution of European Offices. In it, we look at the impact the pandemic is having on behavioural change regarding office use. Here are a few of the highlights.
Despite the current state of the public health crisis, office employees are signalling that they ultimately wish to return to the office. We expect its function will evolve from traditional desk-based working to more collaborative uses to meet the social and business needs of a growing hybrid workforce. As European cities reopen and it is perceived safe to venture back into the office, employees will be presented with greater flexibility. If we are correct, then demand will surely be impacted both in terms of the amount and type of space required.
Our analysis shows at a European level that if the percentage of those working from home increases by 20% by 2025, office occupancy could fall by a cumulative 5.2% and nominal prime rent growth would be 2.7% lower compared to our current House View for 2021-25. As European office markets entered the current crisis with different approaches to remote working, so too will be its lasting local impact after the pandemic. Our analysis shows Madrid, Warsaw and Dusseldorf being the worst hit by a sustained rise in remote working, with Paris, Munich and Berlin being comparatively better placed. A potential countervailing force is de-densification. If occupiers reduce workplace density, whether to ensure compliance with health guidelines or to create collaborative space, the repercussions will be positive for occupancy levels, and could offset the decline brought about by increased rates of WFH.
We conclude by stating that in a world where there is more remote work, the more critical real estate becomes. We see a clear polarisation of demand from occupiers and investors: less quantity, more quality, best and the rest. This warrants a more cautious approach to investing in the office sector; the burden of proof is understandably higher than it was before the pandemic. We recommend prioritising investment into flexible, tech-enabled, buildings in supply-constrained Winning Cities providing multi-modal access, with high sustainability and wellness credentials.
As a result of Covid, the outlook for European offices has changed in a profound manner. Whilst we are alive to behavioural change influencing increased rates of working from home and ultimately demand for space, we have conviction that the role of offices will endure, both for occupiers and investors.