For investors and owners of office properties, 2020 was a roller-coaster year that left an unprecedented amount of office space empty for many months. Although working from home is a challenge for many knowledge workers, in a recent survey 72 percent said they love it.
Many employees wonder if the typical office might become a thing of the past. At the same time, rents were paid at approximately 95 percent of normal levels during the year, and delinquencies of more than 30 days were consistently below 3 percent.
All of this added up: office real-estate investment trusts lost 20 percent of the prepandemic peak of their unlevered value.
The unexpected experiment in remote working surpassed expectations because of the mass adoption of collaboration technologies. It reset expectations for the future because it opened up new possibilities for how much flexibility employees can have in choosing how and where to work. In fact, more than half of employees say that they would like their organizations to adopt more flexible models. Remote working has not been an overwhelming success, however, as issues of burnout and isolation have continued. A recent global study by the Harvard Business Review notes that 56 percent of workers surveyed said that job demands have increased.
And the work-from-home experiment has helped certain populations more than others.
As occupiers reflect on the past year, they are trying to merge the best of the old ways of doing business with the best of what was learned during the pandemic. Many questions are swirling in the minds of office occupiers about how work should be done in the next normal, how to think about talent, what the role of the workplace should be, and how much real estate companies need.
Despite the experience of working from home for almost a year, the vast majority of organizations believe that the physical presence of workers is critical at some regular frequency. For example, recent Microsoft research on 122 billion email exchanges and 2.3 billion meeting interactions shows that although their number increased within employees’ immediate teams and close networks during remote work, interactions with secondary networks are shrinking.
Moments of innovation and cross-pollination may not be happening. As evidence suggests that physical space is still needed, some of the companies that have announced permanent work-from-home options are simultaneously signing major leases or building new headquarters.
The future will be hybrid, but the proportions of work-from-home and in-office time are far from settled. This reflection is already leading many to focus on the in-person, face-to-face “moments that matter” for collaboration, alignment, community, and so on. Office investors are eager to see what these moments are and how frequently they occur—daily, weekly, monthly—to determine both the amount of space office tenants need and the designs and configurations that will promote the types of interactions tenants seek.
Much of today’s office space won’t meet the needs of tenants and workers in a hybrid world. There will be an oversupply of space and a scarcity of offices purpose-built for hybrid work. Spaces, designs, experiences, amenities, leases, food-and-beverage options, and the like will have to be reimagined. In our view, owner/operators should adapt in five significant ways.
Much of today’s office space won’t meet the needs of tenants and workers in a hybrid world. There will be an oversupply of space and a scarcity of offices purpose-built for hybrid work.
Become a solution partner, not a negotiating foe
Most tenants do not yet know how to navigate hybrid work. Many risk drifting into a hybrid model in which they get neither the benefit of having everyone in person nor the benefit of full flexibility. Tenants need owner/operators to come forward with solutions rather than sit as foes across the negotiation table. Owner/operators will have to evolve their leasing approach to become more consultative. Leading owner/operators are already taking steps; for example, many are considering sensor technologies or analytics that use badge data to track occupancy and space usage for their tenants.
The most proactive owner/operators are going even further, building (or partnering with digital companies to build) tools that directly address their tenants’ needs for physical space—for example, understanding desk and conference-room usage patterns. Their aim is to deliver compelling value propositions that go beyond a mere “four walls” to solutions that create convenient experiences, measure in-space factors, and generate insights about what happens within those spaces. These owner/operators offer a digitally powered experience within a set of walls, fundamentally transforming the tenant relationship and the factors that drive leasing and renewal decisions.
Make the workplace magical
Occupiers will increasingly focus on making the workplace an exciting place to be, recognizing that the next-best alternative for most employees—their homes—has turned out to be better than they had imagined. Workers need a reason to get up, get dressed, and commute. Space should be purpose-built for hybrid work. A food-and-beverage ecosystem of restaurants, lounges, cafeterias, pantries, all digitally accessible, has to emerge. The experience of the workday will become more digital: ordering food and concierge services, showing that you’ve complied with a building’s health and safety protocols, booking rooms and workspaces, and so on will need to be as easy as a tap on a smartphone. But the need for a digital experience is about more than just apps that help owner/operators communicate with users of space; it’s about services and experiences contextually embedded within the workplace through the digital layer of office buildings.
Cube farms have to go. The traditional allocation of 70 percent of space to desks and offices needs to be fundamentally challenged. People are going to return to the workplace only if the space is safe, comfortable, easy to navigate, invites collaboration, and offers a “wow” factor. Smart conference spaces, collaboration areas, and lounges (among other models) that inspire the collision of ideas and creativity will come to define the floor plate, depending on the nature of work taking place. Leading owner/operators are providing their tenants with the means to generate this magic.
The new leasing models of recent years were just a start—flexibility will expand even more. On lease structures, owner/operators could begin to experiment with innovations as retailers have. When lessors help a hybrid workforce adapt to new ways of working, they will want greater variability both in the amount and type of space they rent and in the timing of their requirements in a given week or month. As organizations experiment with new models and rediscover their corporate identities after the pandemic, they will seek
space that can expand, contract, and evolve with their new image. Niche work models once associated solely with coworking players will probably become more common and will come directly from owner/operators as they take on collaborative postures with their tenants.
Emphasize tenant selection
Not all commercial office tenants are created equal. Owner/operators will need to think about the mix of tenants and the importance of physical space to their business models and ways of working. Owner/operators that can thoughtfully lease space with these considerations in mind will ensure a “stickier” set of leases to support their business in coming years. Industries, job types, and companies are adapting to hybrid work in different ways. To ensure long-term performance and sustained occupancy levels, it will be vital to take the pulse of tenants to learn what they are thinking and what their people are doing in the office (such as collaborative tasks that require in-person work or sales calls that could be done from home). Just as mixed-use spaces can help hedge the risk of real-estate assets, mixed tenant types provide owner/operators with a hedge for long-term occupancy trends.
During the lockdowns at the height of the pandemic, owners and operators had to evolve new ways of working to service their buildings. From leasing to property management to the tenant experience, the way companies operate day-to-day can become hybrid with the right kind of digitization. Owners and operators must both adapt to and embrace these new models of operations if they are to improve the tenant experience, gain cost advantages, and strengthen the efficiency and experience of their own people. For example, perhaps some property-management services could be delivered by technology to several buildings rather than by staff in an individual building. Leading players are using this moment to test and install new technologies that optimize operations, from energy usage to predictive staffing and maintenance. Many tenants are still not back in the office, so owner/operators are piloting new configurations of their teams and new technologies. Findings from these experiments will prove invaluable and put these owner/operators a step ahead of their peers in the coming months.