Commercial Insights - Occupational Markets: The Great Work Place Experiment
May 2020
5 minutes to read
What we know
Business confidence is diminishing. With widespread social distancing measures and a third of the world’s population in lock-down, the potential economic impacts of COVID-19 are becoming all too apparent. Concerns about the macro-economic outlook are serving to dent corporate confidence, as is evident from recent C-suite sentiment surveys. One such study - Deloitte’s European CFO Survey - found that 63% of those surveyed were less optimistic about the financial prospects of their business than they were six months ago; while 40% were planning to reduce their capital expenditure; and slightly more than a third anticipated reducing headcount over the next year.
Occupational markets are in ‘pause’ mode. Accordingly, the major global office markets have paused. Reducing commitments to capital expenditure has put major fit-out and relocation projects on hold, as corporate attention turns towards building financial resilience to ride out the storm. This pause is evident in our own fortnightly sentiment survey undertaken across 16 global gateway office markets. Active occupier requirements are trending downwards in 12 of the surveyed markets. We regard this as a temporary pause. Occupiers are continuing to strategize, particularly given the clear uncertainties of the post COVID-19 era and the likely continued shortage of quality office supply that characterised global markets as we went into this crisis.
"…occupiers are facing the new challenge of who to bring back into the formal workplace, and how to ensure that the environment is safe, secure and respectful of social distancing…"
Attention is turning to the challenges of re-occupying space. Current strategizing concerns the re-occupation of offices. As governments begin to consider, and in some cases articulate, timescales for a dilution or removal of lock-down measures, occupiers are facing the new challenge of who to bring back into the formal workplace, and how to ensure that the environment is safe, secure and respectful of social distancing requirements that remain firmly in place. This is particularly challenging given the increased density of occupation that has represented the evolution of the office over the last decade.
What we expect
A growing challenge to the binary distinction between working from home and working in the office. As re-occupancy starts to become a reality, there will be growing consideration of where work takes place and why. Working from home has become an enforced reality for many. Indeed, 45% of UK’s the working population has been doing so during the crisis. This poses two dangers. First, occupiers may conflate an enforced approach to work with an optimal approach to work. Second, the wider real estate industry may continue to adopt a binary, either/or, distinction between working from home and working from the office. The future of work, and hence the workplace, will be multi-locational, more dispersed, more flexible, more individual and much more task specific. Future thinking and action will need to reflect this.
Health and safety will be at the forefront of the post-crisis workplace environment and experience. One undeniable point is that there is going to be a much stronger focus upon health and safety in the workplace as an immediate and direct consequence of this crisis. Employees will demand such, whilst employers will have a moral and regulatory obligation to deliver such outcomes. We, therefore, expect health and safety considerations to sit firmly alongside wider considerations of wellbeing to become central to the future workplace experience. This has already been seen in some Asian markets.
Managed solutions delivered through partnership will address demand for greater flexibility. Social distancing protocols have served to place great pressure on the coworking sector, where occupational densities are typically high. Yet re-occupancy challenges, together with the uncertainty of the post-crisis operating environment, are likely to fuel increased business demand for more flexible real estate solutions. We expect the future to be one where flexibility is in demand but will need to be delivered in partnerships that combine access to product of conventional landlords, with the skills of operators in delivering strong services and experiences to customers. Our recent white paper, Power in Partnership, explores this issue in detail.
What we question
Are sustainable real estate solutions achievable in a low growth, cost sensitive operating environment? One of the key dynamics that will shape occupier behaviour, and hence market conditions, post COVID-19 is the need to adjust to a cost sensitive, lower growth economic environment at the same time as responding to the critical, time-sensitive requirement to deal with the climate crisis. The portents here are not strong. Following the GFC many corporate occupiers attacked real estate as a cost and, as they did, cut off those considerations of sustainability that had been on the rise prior to the credit crunch. Today the science is unequivocal. We have 30 years to save the planet. We cannot afford for occupiers of real estate – itself responsible for around 40 per cent of global emissions – to ignore the issue in the interests of balance sheet repair. A new approach will needed.
How does the global portfolio reset as globalisation is further questioned? COVID-19 has served to question the resilience of global supply chains and brought growing attention to unintended dependencies and risks within globally organised businesses. Coupled with a political environment that continues to display traits of isolationism and protectionism, global portfolios will need reassessment. Once again in a cost-sensitive, low growth environment it remains to be seen how rapid and radical this portfolio reset can be.
Is this the end of the densification of the office? The legacy of the GFC ensured that the last decade had occupiers typically attempting to shoehorn more people into less space to support what was regarded as greater financial efficiency. Although, there has subsequently been a growing acceptance of the strategic role that real estate plays within business, the perceived financial benefits of increased occupational density have clearly influence behaviour. We question if, in a world shaped by either the reality or psychological legacy of social distancing, such an approach can (or indeed should) be sustained.