Click here to read the full paper including graphs: IREI Article – John Mulqueen
From the widespread donning of masks, to our approach to buying dried pasta and toilet paper, much has changed since the coronavirus pandemic first made headlines at the beginning of the year.
Perhaps one of the biggest shifts has been in our perceptions of working from home and the role of the office. As recently as February of this year, a company’s working-from-home policy, if it had one, was viewed as a reflection of its ethos — a soft perk to attract a more diverse pool of talent. In more traditional companies, managers often viewed working from home as “shirking from home” and something only to be tolerated in exceptional circumstances.
Now, there has been a radical shift in how we approach the concept, underpinned by a new-found realisation that employees can be trusted to work remotely and that productivity can be sustained, or even enhanced, at least in the short term. When we return to normal, there will likely be a widespread acceptance of remote working that we may never have experienced without the virus, and certainly not at the same pace or scale.
Be careful what you wish for
Nevertheless, despite benefits such as having no commute and being able to wear informal clothing, there are downsides to working from home.
We are a social species and we miss the collaboration and face-to-face communication that working in an office brings, as well as the opportunities for learning and innovation that are essential to our personal development and business culture. Offices are designed for working; our homes are not. Many have been frustrated by unreliable internet connections, unsuitable space to enable productivity and various daily distractions. Others have also complained of a lack of appropriate furniture and equipment to support physical health, as well as struggling with having to be ‘”always on” work mode, which has had negative effects on mental wellbeing.
The working-from-home experiment may have been successful for the last few months, but that is against the backdrop of widescale adoption due to government guidelines. Whether or not it is a good thing in the long term, as many begin to return to the office, is far less certain. The big question for investors in office markets is therefore clear. Has demand for office space fundamentally changed?
To make assumptions about the future of the office market based on short-term behaviour during a period of crisis would be a mistake. Take the UK as an example. Figures released by Morgan Stanley in early August suggest that only 34 percent of UK workers are back in the office, but this has doubled from 17 percent in July, and is set to increase further as we move into the third quarter as more large employers reopen their offices.
Rather than a wholesale move to working from home or an overnight return to the office, we are much more likely to see a phased return, with employees spending part of the week at home. A survey of 2,000 UK finance professionals by the Chartered Institute for Securities and Investment (CSI) found that 46 percent did not expect to return to the office for the same number of days after the pandemic has subsided, while train operators, such as Great Western Railway, are reportedly looking to bring in three-day-a-week season tickets. A typical working week could well include working remotely some of the time. This would allow people to choose a different work-life balance, benefit from the office environment for part of the week, and reduce congestion on both public transport and within offices.
There has been much discussion about the shape of the economic recovery from the pandemic, with many settling on an athletic Nike “swoosh”. Similarly, we cannot expect human behaviour and office occupancy to move on a pendulum swing. Crucially, while there may be a sustained increase in working from home, any reduction in space demand will not be on a like-for-like basis. Currently, occupiers can typically only use around 40 percent of their space while maintaining social distancing. Over the longer term, fewer people might visit the office in a typical week. However, if offices are principally used as places to meet, collaborate and communicate, those activities characteristically need more generous allocation of space. This could reverse the trend over recent years for more intensive utilisation and fitting ever increasing headcount into smaller spaces.
A better experience
If staff are only using the office for a few days a week, then the experience needs to be worth going in for. This means great air quality and natural light in highly sanitised surroundings, technology that reduces waste and enhances experience with good amenities nearby. All of this can enable effective collaboration, as well as helping people participate and contribute to a company’s vision and culture.
This is why, in Europe, the much-debated “hub and spoke” model of having one smaller central office with additional regional bases is unlikely to work as a long-term solution to occupier requirements. Not only is having multiple offices more complex and costly, it misses the point of bringing people together in one place, losing many of the benefits of human interaction.
The switch to full-time remote working is clearly not permanent. Companies recognise the value of bringing their teams together and are increasingly looking to get their staff back into the office. They recognise that working from home is not for everyone and that junior staff, in particular, want the buzz of an office environment and need to be around more senior colleagues to develop. The role of the office may evolve, but its importance has not diminished, and the quality of that office space will be more important than ever.
The most likely scenario is that there will be a polarisation in the market as investors focus on the best locations and core assets, while secondary offices will either need to be refurbished or repurposed for uses such as residential.
The key is to understand which locations will remain attractive in a post-coronavirus landscape and remember that there is not a one-size-fits-all solution across different geographies. For example, Europeans are more likely to commute via public transport and have the freedom to use local amenities after work than in the US, where driving is much more prevalent. Naturally, this impacts the type of buildings and locations that are in demand, with city-centre offices likely to have enduring appeal in European markets.
Investors should minimise risk by focussing on cities that are structurally undersupplied and have forecast total returns that offer good relative value by choosing locations with an enduring occupier appeal in light of the pandemic. Assets will also need to be — or be capable of becoming — an attractive, future-proof, modern office space that is sustainable and tech-enabled to accommodate flexible working practices.
A simple way of looking at this is to understand how employees will travel to the office, and how certain assets or asset management strategies in particular locations could provide a defensive and attractive office investment. For example, it is entirely conceivable that, in the wake of the crisis, people might choose to live further out from city centres and might be less keen to take two modes of transport into the office, so employers looking to attract and retain talent will want office space that supports this. The ability to draw on a wide talent pool due to high-speed train lines could easily make destinations even more attractive, and more resilient than a location that would require further travel via metro.
This means that mass transportation hubs, such as Gare du Nord, Frankfurt Hauptbahnhof, and Atocha in Madrid, will be more attractive over time, and may see the kind of regeneration that has transformed the outlook for Kings Cross, Paddington and Victoria in London. Equally, occupiers are more likely to be drawn to assets with facilities for active commuting or assets with the potential to provide them. This was a growing trend prior to COVID-19, but now will be essential to ensure the property is fit for purpose in the years to come.
Ultimately, the needs of the occupier underpin investment decisions in offices, and rather than being changed by the pandemic, the themes that were driving demand, such as wellness, and technology, have been accelerated. Fundamentally, the need for communication, collaboration and the opportunity for spontaneous creativity, as well as the serendipitous conversations and relationships with colleagues that go to the core of a business culture, have not been dampened by the crisis, and the office will continue to play a central role in how we work.