By: Thomas Hughes
Real Estate

The COVID crisis is throwing up all kinds of challenges for the real estate industry. Some of these are rapidly accelerating trends that we’d recognised well before the pandemic, but others are entirely new. Bohill Partners are hosting a series of events bringing together senior industry leaders from specific areas of the industry to share their thoughts on the critical issues that they are dealing with.

Having covered retail in our last roundtable discussion, this time we turn to the office. COVID-19 has led to an enormous social experiment, forcing millions of office workers around the globe to work from home. This has led to numerous predictions of the ‘death of the office’, with big US tech firms such as Twitter being the first to tell their workers that they never have to come back. If this is true, then alarm bells should be ringing across our industry – no workers in offices surely equals no tenants in buildings?

We gathered 15 senior leaders from some of the most influential office investors, developers, advisors, data providers, and occupiers to talk through what this means for the industry.

How are employers coping with their teams working from home?

Arguably, the trend towards working from home was already well under way before the COVID-19 crisis – certainly, there was a lot of pent up demand for it, and many firms had begun to embrace it. However, two key factors have led the majority of firms to be resistant to promote working from home: trust and the ability to collaborate effectively. Will people work as hard when they are at home, without the watchful eyes of their bosses and colleagues? And can they effectively work together over Slack and Zoom with the same effect as having those conversations face to face?

We’re still only three months into the lockdown here in the UK, so we haven’t gathered enough data to firmly answer these questions yet. One of our guests provided data showing that the key determinant of people feeling productive is the ability to do desk-based, individual work. It stands to reason that this is easier for most people at home rather than in an open plan office, but does this feeling translate into businesses actually making more money? The collaboration point is also interesting – from the feedback our guests have had, some groups are finding this much easier than others. Those who rely more on ad hoc contact to create innovation are struggling, as are those groups made up of extroverts (sales teams being the most obvious example), as it’s much harder for them to feed off each other’s energy without being in the same room.

It’s also important not to over-generalise from our own situations – our guests (and most commentators) are fortunate enough to have a private space in which to work, relatively distraction free. They are also at the stage of their careers where mentoring and pupillage is less important for their professional development than it is for a new graduate. Frankly, much of the work that a trainee accountant, investment banker or lawyer has to do is not particularly stimulating – one of the things that makes those training schemes so popular is the close contact with senior people who are experts in their fields.

How good is our current situation as a proxy for working from home in more normal times?

Frankly, not good at all. Most people aren’t having the ideal work from home experience – whether it’s having the kids at home and requiring schooling, or being in a small flat share with three people having to take calls in the same room. Does this mean that we’d be even more productive at home in more normal circumstances?

Not necessarily – the COVID-19 situation has changed things in other ways too. Whilst many employers have been impressed by how much work is actually getting done, there are a couple of reasons for this that aren’t related to working from home. The first is that almost every firm is going through crisis management in some shape or form, and people invariably work harder when there are a lot of urgent and important things to get done. The second is the lack of alternatives to working – if the option to leave your house and see your friends and relations isn’t there, you’re much more likely to spend time in the virtual office. Once these two things change, will we really be this productive?

So, will the coronavirus trigger a fundamental change in our relationship with the office?

The workforce certainly appears to be in favour – over 72% of employees expect their companies to implement more flexible working, even after the end of the pandemic. That being said, one of our occupier guests had surveyed the thousands of employees at his firm, and 94% of them had a reason for wanting to go back to the office, predominantly for the human social contact.

A lot depends on how long the lockdown lasts – the general feeling amongst the group was that people will quite easily slip back into old habits if they are back in the office by the summer. This potentially means that we will see bigger changes in cities like London, where the vast majority of people get to work by public transport (which means longer out of the office), than we do in the US or Germany, where driving to work is the norm in most places.

Our guests noted that the conversation shouldn’t just focus on working in the office vs. working at home – there are likely to be a number of different models, and a shift of the workplace from being one physical place to a multitude of physical and virtual ‘places’.

Does this mean that the corporate HQ in a business hub location is redundant?

No, certainly not for large businesses. London (and other major cities) will remain as the heart of the company culture and where key decisions are made. But, it does mean that the purpose of that hub needs to change. The office is no longer just a place to do work, it’s a ‘social condenser’, a place to do collaborative work. This puts pressure on designers and on landlords – how do you design places that people want to go to and that encourage collaboration? The space is likely to be smaller, and occupied less densely – people may well be working at home or near home for that work that is best done in a quiet environment without phones ringing and colleagues all around you.

But, it’s important not to overreact – one guest cited Amara’s Law (that we tend to overestimate the impact of a change in the short term and underestimate its effect in the long run). What we’ve seen over the past decade is urbanisation and consolidation – companies taking less and less space in more prestigious locations, and outsourcing non-core functions to non-core locations (or out the company completely, which will certainly continue. Our guests based in Continental Europe, where people are starting to go back to work, are seeing that people haven’t changed, they are very much enjoying the collaboration and camaraderie that is much more present in a physical office. A few months away from the office will not change the fundamental human desire for social interaction.

And what does this mean for offices as investments?

There will still be demand for large buildings on long leases, but all our guests agreed that the need for more flexible, short term space will continue to grow. The nature of demand for office space is changing; occupiers want more and more flexibility, and we’re seeing the rise of ‘space as a service’ with a much closer relationship between owner and occupier. Occupiers are also demanding higher quality real estate with more sophisticated integrated technology – but how do we pay for this? It has proven very hard to get tenants to pay a premium for the flexibility and the improved space, and with a recession looming it seems even less likely that this will happen in the next eighteen months. Occupiers are looking to cut overall real estate spend – reducing the space they take will do this, but will they be happy to spend more per square foot for space that is fundamentally better suited to what needs to happen in the office in future?

With all this in mind, a key issue to discuss is how valuation methodology needs to change away from simply the length of a lease. Investors haven’t quite got their heads around how to value flexible office space – shorter leases or licences, often to smaller businesses, inevitably result in less secure income than a 20 year commitment from an established business, but you benefit from a much more diverse tenant mix, taking away some of your risk.

Thanks to our guests for a fascinating discussion.

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