Irony Alert: More Than Half Of All Real Estate Companies Think They’ll Need Less Office Space
More than any other industry, real estate has a vested interest in making sure office occupiers don’t cut their real estate footprint. Office is the largest of the real estate asset classes, and a reduction in demand would lead to falls in rents, valuations and fees for huge swathes of the industry.
The sector has been doing its best to argue that the upheaval caused by the coronavirus won’t have a huge impact on office demand. And yet a new global survey of more than 550 real estate professionals across the globe, undertaken by the Urban Land Institute and EY, found that more than half (53%) of those polled expect the amount of space needed by their organisation to decrease.
Slightly more than a third of those surveyed (37%) expect their real estate footprint to stay the same, and 10% think their organisation will increase its office space requirement. Overall, the sector is split down the middle on whether overall office demand will decrease.
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The ULI and EY report showed the calculus that is driving the expectation of decreased office space requirement.
That won’t necessarily mean working from home for all of that time — flexible, satellite offices on the edge of towns and working in “third spaces” like hotels and cafés optimised for work will become more prevalent.
The impact for office real estate will be a need to properly embrace the concept of flexibility, rather than just pay lip service to it. Almost all (96%) of those surveyed felt that corporate occupiers would want a more flexible office footprint. Two-thirds thought flexible lease contracts would become the norm in the office industry, and almost as many (60%) thought large occupiers would begin to use flexible office spaces as a standard part of their portfolio.
That may lead to a wave of property conversions from obsolete office stock to new uses, particularly rented residential.
“Flexibility is the consistent demand we are hearing,” ULI Europe chief executive Lisette van Doorn said. “Employees expect it from their employers and corporates from their landlords. Especially over the shorter term this focus is accompanied with a drive by corporates to save costs, as many try to cope with the negative economic impacts deriving from the pandemic.”
But ULI doesn’t expect this will reverse the trends of the last decade or so. ULI said the office will still play a major part in corporate culture, and its quality and location of office space will continue to be an important selling point in attracting and retaining talent. Van Doorn said environmental, social and governance will also remain a priority for companies and their employees.
“This provides opportunities for real estate players who have embedded these elements in their corporate strategies and buildings, for their branding and to build stronger, longer-lasting relationships with tenants and users,” van Doorn said.
Respondents in the survey said they expect office space to remain the locus for teams that needed to collaborate, helping new staff to imbibe a company’s ethos, allowing management to nurture talented staff and business development.
“While the total office space is likely to decrease, the quality of real estate will be even more critical,” EY Consulting Associate Partner Vincent Raufast said. “The physical office space will play a key role in preventing a loss of corporate culture, less effective talent management, a higher staff turnover and a loss of creativity. It will need to meet new demands including healthy building amenities and more space designed for collaborative work, as well as formal and informal meetings with colleagues.”