‘Office is the new retail’: how hybrid work is affecting real estate
Will hybrid working disrupt office real-estate in the same way that online shopping upturned the retail sector? A new global survey from ULI and PwC says that real estate must work harder for its returns
Real estate must work much harder for its returns, according to the latest worldwide survey of senior property professionals conducted by the Urban Land Institute (ULI) with PwC.
The 2023 Global edition of Emerging Trends in Real Estate® paints a general picture of caution and concern, although the report notes that ‘there is some hope for renewed investment activity later in the year following the destabilising impact of high inflation and rising interest rates over the past 12 months’.
According to the survey, real-estate leaders envisage a ‘flight to quality’ when it comes to the underlying assets. Nowhere is this more apparent than in the office sector where great uncertainty remains more than three years on from the Covid-19 pandemic as to how much companies and their employees will use office buildings as hybrid working becomes more prevalent.
ULI and PwC report that property leaders are worried that the scale of disruption that has rocked retail property will hit the office sector. This sentiment has regional variations, however. Some investors in the US are avoiding offices altogether in the short term, says the survey, while in Europe and Asia Pacific, investors appear more open to seeking out value-creation opportunities despite the difficulties in the office sector.
Clearly, long-term trends such as hybrid working and online shopping remain as major challenges to real estate. The report observes that ‘although the office sector is likely to remain a mainstay for most institutional investors, there is no consensus around where occupier demand in a hybrid working world will settle. But there is a strong sense that the sector will experience something of the same disruption as retail, albeit through different structural drivers.’
One global investor is quoted as declaring: ‘Office is the new retail.’
Flight to quality
Among the emerging trends identified, the environmental, social and governance (ESG) agenda was generally seen as becoming more pressing than ever before. There was also a consensus around a ‘flight to quality’ in city centres where there will be a ‘bifurcation’ between prime and secondary, ESG- compliant and non-compliant, offices.
‘The risk of obsolescence is invariably the sub-text…’
High-quality, energy efficient offices close to transport nodes will command premium rents and prices. For sub-prime assets, the report notes that ‘the risk of obsolescence is invariably the sub-text here’. However, the definition of ‘high quality’ was open to wide interpretation. Like retail, the office is likely to become more experiential, says the report, which was launched at this year’s MIPIM real-estate market event.