Doing some end-of-the-year housekeeping on my computer, I stumbled across a 14-month old ‘almost finished’ blog post. It discusses the challenges that offices are facing, making suggestions to landlords and investors of how to protect against any such headwinds.
As the content is still extremely relevant and timely, I decided to use it as the last piece of this year, even though some of it seems a bit out of place (a summer vacation reference…). Anyway, happy reading!
A few months back, I was discussing a set of slides with my boss. Me, occupying my baby’s nursery (since writing this we got our second baby!1), which I had annexed during the great lockdown, he, sitting in his car at a pine-lined beach in France during his well-deserved vacation. Was it any worse than sitting in one physical space? Not very much. And thinking purely professionally, for that occasion, not at all. So, why return to the office?
Acknowledging all discussions, doomsaying and denial of the last few months (and years), I think it is fair to say that the future of the office is neither black nor white. And, while offices clearly have a future, the lives of asset managers and landlords have become more difficult: the industry needs to find ways to attract office workers – or entire companies in fact – to their assets. To do so, one needs to make them want to be in the office. If you don’t, your income is at risk.
The super-mobile society
For a number of years, there have been protectionist tendencies globally, the most prominent claim of this being ‘America First’2. As COVID-19 hit, such tendencies strengthened initially, as international travel was and still is highly restricted. This led to claims that globalisation could halt or reverse due to the highly restricted mobility. But was it though?
Only partly, because technology helped to overcome physical distancing and travel restrictions. We are in the position to work on international projects from remote locations – as long as the digital infrastructure is of sufficient quality. The pandemic has shown impressively: The location in the physical world has become much less relevant.
The continuous rise of the super-mobile society, which embraces locational independence and supra-national exchange, will continue to facilitate a secular shift of work ethics and practices. And, while there is still a lot of technical potential in the virtual world3, typical office-bound professions have seen a massive boost in locational independence over the last twelve (twenty-four) months.
Very generally, for quite some time, we have seen a transition of power from producers to consumers. Think streaming platforms like Netflix, which allow the consumer to build the programme, taking it away from classic broadcasters. Similarly, the super-mobile society, which includes companies, chooses the place of work. And, as this is a matter of choice – there need to be reasons to go to the office.
A risk to traditional office space demand
Given the high degree of uncertainty stemming from the pandemic itself and the vastly increased office worker mobility, market opinions of the impact on the office sector vary to a great deal (this has not changed over the last 14 months). There are cautiously optimistic views, claiming that the impact on the market will be minimal and any decline in workforce appearance in the office will be offset by the need for larger and more conference rooms, for example. On the other hand, Capital Economics, has in an early study 4 calculated the potential impact of the effect of mobile working for Europe’s largest office markets.
Capital economics expects the office vacancy rates in most European markets to rise constantly over the next five to ten years, varying by market. While the impact differs strongly from market to market, in some instances severe drops in office rents are forecast – for example up to 40% in Berlin.
[…]
This is the point, where the initial article fades out with a handful of random ideas and formulations. However, the key point is made, and it very much holds today. Office attendance by both workers and companies will largely remain a matter of choice. While the latter analysis from Capital Economics seems way exaggerated from today’s point of view, there is, in general, a high degree of necessity to consider actions to secure tenants and minimise the risk of office building obsolescence.
Location, Asset Quality and Services are key to future proof your office
Exhibit 1: Key variables for future proof offices
We believe that there are three main pillars that will secure tenancy in offices over the long run: The quality of the location, the quality of the asset itself and accompanying services. Without commenting on every detail of Exhibit 1, we conclude that central, urban and dense office locations are in a particularly good position to satisfy modern and future office users’ needs. We also believe that a good location remains the decisive factor for successful office investments.
Source: CORESTATE Research
The asset quality plays an important role on various levels. Firstly, a strong ESG concept is a given and a necessity. The same applies to top-notch digital infrastructure, including redundant cable connections, WiFi throughout the building etc5. And lastly, but probably most importantly, flexible office structures, which can adapt the space utilisation as space requirements change over time, are key to future proof an office.
Services have increasingly become important and go far beyond the classic laundry service. Services become very powerful USPs when they are thought of on a large-scale and go into the building structure itself. This begins with curated communal areas; continues over ‘rentable’ large-scale conference rooms6; and ends with integrated serviced apartments that allow supra-nationally operating companies to efficiently execute global workshops and projects.
While many of the aspects above can be found in newly built properties, the majority of the existing stock is lacking this potential. So, there is both risk in the form of potential building obsolescence but also opportunity: ‘Manage to core’ and ‘future proofing’ value add strategies, that turn existing buildings in good locations into modern and top-notch assets, should prove viable strategies to secure long-term tenancy and income, while creating value.
And now for something completely different: Have a happy holiday season
Thank you for reading our PropBlog and thank you for staying with us in 2021. We are looking forward to welcoming you back in 2022 to discuss the state of the future.
Myself, the research team and everybody at CORESTATE wishes you an inspiring, peaceful and relaxing holiday season.
1 Current comments are formatted in brackets and italics
2 Given that the dominant global companies all operate in a distinctly supra-national manner, in fact a large part of their operations is happening in the digital, borderless space, nationalist tendencies appear very out of time.
3 Think AR and VR set-ups
4 European Commercial Property Focus, Sep 14th 2020: Remote working poses significant downside to rents; Capital Economics
5 As is measured and certified by specialists like WiredScore
6 Not every company needs a 30-seater boardroom every day. In fact, the fewest do
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