How can office real-estate come to terms with a new reality?
The latest global indicators for the office property market point with growing clarity to a state of hybrid permanence with companies seeking higher-quality space, but less of it
Real-estate professionals scouring the global office market for green shoots of recovery this summer may well be having the experience of rolling around on brown grass. That’s because multiple indicators in the sector are beginning to settle on a more fixed direction that may not be disastrous but can hardly be said to be encouraging.
When research by the Centre for Cities thinktank revealed that office workers in central London are now spending 2.3 days a week in the workplace on average, the messages in its report, ‘Office Politics: London and the Rise of Home Working’, reflected broad trends seen elsewhere.
‘Office occupancy in the top ten US cities now hovers around 50 per cent…’
US data from Kastle’s Back to Work Barometer, which measures gate-entry clicks from access control systems in American offices, found that occupancy from March to the end of May 2023 in the top ten US cities was now hovering around 50 per cent. While cities like Houston, Austin and Dallas are bucking the trend by sitting above the halfway mark, others like San Francisco and Philadelphia are dipping well below it.
According to an analysis by the real estate practice of global lawyers K&L Gates, US tenants are seeking reductions of between 20 per cent and 30 per cent of their existing space; projections suggest upwards of 300 million or more square feet of American offices could be unoccupied as a result.
Impact of hybrid work
Factor in high-profile moves by large firms to squeeze their property portfolio and you begin to see a clearer picture of what hybrid permanence will look like. HSBC, for example, has announced that it is to significantly downsize its headquarters by leaving Canary Wharf in London after 20 years, to relocate to BT’s former offices near St Paul’s Cathedral.
Despite increasingly harsh rhetoric by top business leaders about the need to get everyone back to the office, there are few signs that employees are being cowed or coaxed to return on a full-time basis. According to research by Professor Nicholas Bloom of Stanford University, who has been studying the rise of hybrid working, employees value the ability to work from home as equivalent to an 8 per cent pay rise. Governments too are looking at enshrining the right to work from home in law; this aspect is a key policy plank for the Labour Party in the UK.
Not all bad news
Where does all this leave the office real-estate sector? While there may be some scorched earth, it’s not all bad news. The ‘flight to quality’ is clearly underway in many cities, which means that Class A offices in prime locations with high ESG and sustainability criteria are in increasingly high demand. The smarter, greener and better connected the workplace, the more the leasing deals are likely to flow. In contrast, outmoded, unmodernised, sub-prime office blocks in less attractive locations are set to suffer horribly and will be ripe for repurposing for other uses, primarily housing.
There’s also a more balanced viewpoint emerging from surveys of employee sentiment about the relative benefits and drawbacks of remote working. The WFH honeymoon is over. Workers increasingly value being around other people and seemingly accept that the office will play a significant part in the future landscape of work, especially around collaboration and productivity.
But, as Gensler’s new survey of office workers in nine countries suggests, office assets might need to be upgraded (and, in some cases, completely reimagined) if occupancy rates are going to creep north of 50 per cent. People don’t want to return to the pre-pandemic state of the workplace.
Here to stay
The wider truth for the office real-estate sector is that you can’t turn the clock back. With Mondays on life-support and Fridays ‘dead forever’ in the words of one commentator, hybrid working is here to stay. Landlords, investors, managers, tenants and their supply chains are all going to have to adjust their models to give occupiers what they really need in terms of office space while making the business side work.
It’s a tough corner to manoeuvre out from, but adjusting smartly to the new realities on the ground will be the only route to reach those green, sunny uplands.
