Market Digest

Hybrid Working and demand for a ‘Third Space’ on the rise

The World Economic Forum has reported that McKinsey believe 90% of companies anticipate a move to a hybrid operating model where employees are split between their office and home – however, as part of this approach, a third way of working is “growing increasingly popular”.

The potential monotony and distraction of working from home constantly for 18 months led to almost 2.2m people worldwide opting to work, at times, from a flexible office space during 2020 (128 times more people than in 2010). 

This desire to have access to a third space is a feature of modern tenant expectations and is here to stay; as found in recent research conducted by Verdantix (May 2021), companies deem access to a premium third space as a key tool in attracting and retaining talent (see Figure 2 in the Verdantix report). This is because of the expectation end-users have around premium, remote working experiences (see Figure 3 in the Verdantix report). 

Sources: 

• World Economic Forum article
• McKinsey Future of Work Report
• Verdantix Research 

Demand for flexible space in the UK up 37% in H1 2021

Property Funds World has reported that demand for flexible workspace in the UK is up 37% for the 6 months to 17 June 2021 in comparison to the same period of 2020 (source, The Instant Group). 

Demand for flexible space is bouncing back from what was a difficult end to 2020. This increase is driven by employers wanting to bring workers back into an office whilst offering talent a better work-life balance with reduced commuting times. 

This increase in the short-term is supported by the longer term trend of organisations taking a “shorter term view of their real estate portfolio”. Consequently, average lease times have decreased from 10.4 months in June 2020 to 8.9 months in June 2021.

It’s a similar story in the US. According to Bisnow, who quote data from Upsuite, demand for flex office space increased 41% nationally from Q1 to Q2 this year. 

Sources:

• Property Funds World article 
• The Instant Group 

RICS Publish their latest Global CRE Monitor

The Royal Institution of Chartered Surveyors (RICS) recently published their latest Global Commercial Property Monitor; their monitor acts as “a quarterly guide to the trends in the commercial property investment and occupier markets” and tracks sentiment as well as the state of supply and demand within commercial real estate. 

RICS reported that sentiment among global investors and occupiers has improved for the fourth successive quarter; demand for office is either flat or improving as a general rule across North America, Europe and APAC. Despite this, in the US, some major cities are faced with office oversupply (RICS, Global Commercial Property Monitor, page 5), making it more important than ever for landlords to differentiate their offerings. 

Source: 

• RICS, Global Commercial Property Monitors

+Vaccinations, + Flex Office Demand

Data from workspace innovation group Instant Offices has revealed a link between demand for flexible office space and vaccination rates. They compared data from their listing platform in New York City, Miami, Chicago Denver, San Francisco Atlanta and Dallas and found that demand for flexible workspace is greater where vaccination rates are higher. The results were similar when looking at data in the UK and EMEA.

Cities with higher vaccination rates are also seeing increased demand from enterprise clients, barring San Francisco, which is seeing smaller footprint requirements.

Developer Confidence in European Office Market

Savill’s recent market outlook examines 25 European markets and the supply and demand equilibrium. They state that 5.23m square feet of office space is expected to be delivered this year, up 24% from last year’s completions. The development pipeline corresponds to approximately 4% of stock. Fifty-four percent of the space in the 2021 pipeline is already committed and they project 7% YoY recovery in take-up for 2021, albeit 33% below the five-year average.

In terms of office space requirements, the report points to redesign of office spaces to adapt to employee priorities for safety and wellness. Flexible working is in demand and some companies are reducing overall space requirements while others are adopting hub and spoke models and on-demand flexible office space closer to residential areas. Flexible and mixed-use assets are factors of choice for occupiers. Savill’s points to increased competition among landlords, citing operational efficiency and quality of services as key factors of consideration for occupiers.

Cautious Optimism for NYC Office Market

New reports point to increased leasing activity in Manhattan over the previous quarter. According to a CBRE office market report, Q2 leasing rose 20% totally 3.47 million square feet. A Savills study suggested leases signed climbed 20% to 4.9 million square feet from the previous quarter and sublet supply declined by 700,00 square feet to 21.3 million square feet.
As employees slowly return to work, it’s becoming apparent that amenities are a must to attract tenants, naming healthy and comfortable layouts and environmentally friendly features.

CBRE Forecasting 15-20% Global Real Estate Volume Growth

CBRE recently published the results of their 2021 Global Investor Intentions Survey, which broadly paints a positive picture of recovery from pandemic-induced downturns across global real estate investment markets. CBRE is forecasting 15-20% year-on-year growth in 2021 global real estate investment volume as employees return to the office.

Within the 9 key trends identified from the survey, CBRE found investors are strengthening the appeal of the office with flex space offerings and experiential services. In terms of the most in-demand building attributes in the future, flexible office space options and shared meeting space ranked number one and two respectively. It’s also interesting to note that connected technology, building apps and touchless technology were also identified by more than half of respondents.

Changing Employee Attitudes Towards Workplace Expectations

JLL recently published results from their latest global office worker barometer, showing that forced remote working due to Covid-19 has created opportunities, but also exposed new social risks such as virtual fatigue or burn-out.

The research, based on responses from 3,317 office workers from 10 countries raise some interesting key findings, including:

• An outstanding office is the best way for businesses to engage employees, with ‘office nostalgia’ high in exceptional offices. 69% of people highly satisfied with their office environment strongly miss their office, as opposed to only 5% for those not fully satisfied with their usual office environment, showing the office has a major role to play in helping employees navigate out of the crisis.
• Homework fatigue is growing as workers increasingly miss ‘office life’, which is leading to aspirations of more balanced working patterns. 63% of the workforc
  e want to keep the possibility to alternate between different places of work in the future.
• Productivity at home is declining with a 10% drop in workforce that feels more productive at home than in the office, which is leading to new expectations for the office. 47% say are they are satisfied with their office today, which is a major drop compared to 63% a year ago.
• Flexibility in working patterns has become a ‘must have’ in the employee package, with 88% of the workforce wanting more flexible working hours in the future. This is most likely driven by 79% of respondents saying the time saved on commuting having been used to improve quality of life through more leisure time, or being able to better deal with family responsibilities.

The report leads JLL to believe that the office will become the primary place of work again but must upgrade to meet the new priorities of the workforce.

London 'At Risk' of Running Out of Flexible Office Space by the End of 2021

An article in the Facilities Management Journal gave a stark warning from O&A Property Consultants, that London is ‘at risk’ of running out of flexible office space by the end of the year.

The article points to the effects of Covid leading to a huge rise in demand for flexible office space, as employers rethink their workspace needs and worry about being left with empty, expensive real estate in the face of ongoing and unexpected future lockdowns.

The increased demand is driving up the prices of flexible space, with a prediction that the average cost of a London desk could rise by as much as 40 per cent, to around £700 per desk per month.

How Can Commercial Real Estate Move at the Speed of Business?

While the pandemic heightened the importance of office scalability and agility forcing businesses to rethink their commercial real estate strategies, it also brought the focus back to the employee. In the post-pandemic world, employees will become consumers of office space forcing HR, IT and CRE to create an engaging space that meets the employee’s needs.

The Instant Group takes an in-depth look at the impact of the pandemic across the US and Canada with the goal of answering the question: is adoption of flexible workspaces the key to enabling commercial real estate to catch up to the needs of modern businesses? One interesting takeaway is that after taking a dip in the early days of the pandemic, demand increased by 21% from the first half of 2020 to the second.

EMEA Office Snapshot, Q1 2021

Colliers have published a quarterly report, reviewing key trends emerging within the EMEA office market. Their report notes that whilst many occupiers are moving towards complete, flexible working models, new office space requirements cannot be ignored. Tenant requirements are expanding and are increasingly driven by an appetite for quality, ESG-amenable products in core locations that are capable of attracting skilled talent. Technology will play a critical role in meeting these requirements. Colliers expect to see many innovative and interesting examples of how to make the most of office space on the market.

New Research Identifies the need for Landlords to Refine Flexible Strategies; Those Who Do Will Thrive

New research undertaken by independent research and advisory firm Verdantix highlights how there is a significant misalignment between landlords and commercial occupiers regarding the role of flexible workspaces. So much so, that only 13% of occupiers believe that landlords are strongly positioned to serve their flexibility requirements.

Although nearly two thirds of occupiers (60%) plan to leverage flex space over the coming three years, only half of landlords (53%) are currently offering a premium flexible space option. The report reveals there is disconnect regarding expectations and actual offerings when it comes to landlord and occupier opinions in the flexible workspace market, especially towards technology needs.

The Future of Cities, Work and Office Space

Real estate and technology thought-leader, Dror Poleg, spoke on The Prof G show with Scott Galloway to discuss the future of Cities, Work and Office Space. Dror addresses the impact of technology on unlocking flexibility across real estate assets to meet customers’ increasing demand for services, agility and design. The conversation addresses the potential returns for real estate owners and operators that can de-risk assets and attract and retain customers.

Global occupier survey points to office-first hybrid policies

Cushman & Wakefield recently surveyed over 300 global occupiers and members of CoreNet Global to understand what the post-pandemic workspace ecosystem will look like. The research underlines the changing role of the office as a place to foster corporate culture, collaboration, innovation and creativity.

More than half (58%) of global respondents will take an office-first hybrid approach to work to foster greater flexibility. However, the future of the workspace is not one-size-fits all. The backbone to support such flexibility is technology that can efficiently connect people across locations, enhance collaboration and support seamless access to different types of employees and their work.

The Flexible Office Breakdown

Tenants are demanding more of their landlords – flexibility, shorter term leases, more services, and safer, more secure workspaces. Landlords and operators are scrambling to weigh the risks and benefits of rolling out flexible propositions that can help attract and retain tenants. In this 2-part podcast, Franco Faraudo at PropModo speaks with the movers and shakes of flex as they highlight the challenges of this approach to office space.

Have a listen to get under the hood of the challenges and advantages of flexible office models.

Deloitte: Digital Transformation and Tenant Experience are a Business Imperative

In the latest CRE Outlook from Deloitte, 200 industry leaders shared their insights on how their companies are recovering from Covid-19. The findings show that the pandemic has accelerated the use of technology in the CRE industry, but for 56% of respondents it also uncovered shortcomings in their company’s digital capabilities and affected their plans to transform.

The pandemic has also made improving agility a top priority for CRE, which requires companies to focus on the digitisation of key business processes as well as the tenant experience, for example through the use of apps. While many companies are now planning to accelerate digital transformation, only 40% have defined a digital transformation road map. In addition, only one third of respondents believe they have the resources and skills required to operate a digitally transformed business.

To strengthen operations and build trust with tenants, the report suggests companies should look to adopt a structured approach to digital transformation, bolster cybersecurity and data privacy efforts, and use analytics to make data-driven decisions.

With the right technology, flexible workspace providers can speed up their digital transformation, by simplifying and automating core processes. The right technology will also avoid the need for complex supply chains, outsourcing partnerships or large technology teams.

Optimism in Flexible Workspaces on the Rise for Landlords

Savills recently published the results of their Landlord Flex Survey, looking at the importance of the office and future prospects.

As the pandemic has progressed, the perception of how people will return to the office has evolved and while acceptance of working from home has increased, the importance of the office has also been reinforced. Businesses know the office is still important for maintaining the right culture, and employees still see its value in terms of collaboration, mentoring and networking. A hybrid model of home and office working has emerged, for which the flexible workspace market has a major role in delivering.

And landlords have obviously seen this potential. 62% are optimistic towards the flexible office sector, and while 29% already operate a flexible offer, a further 29% would ‘like to’ or ‘are planning to’. But this doesn’t mean landlords are looking to go it alone. Nearly a third consider a flexible workspace operator as important, while another third consider the presence of an operator as a ‘nice to have’.

Shaping Human Experience - Hybrid Work and Four Emerging Worker Profiles

Also focusing on the emerging hybrid work model of home and office working, JLL’s recent ‘Shaping Human Experience’ report identifies four unique worker profiles, characterised by their appetite for home working:

• The Traditional Office Worker wants to work exclusively in the office, demanding in-person activities and an office-centric work pattern.
• The Experience Lover demands high flexibility and consider the office as a key destination. They want to be at home one or two days a week.
• The Wellness Addict puts their work-life balance first, demand flexibility and choice, and prefer three to four days at home.
• The Free Spirit has the biggest appetite for remote work. They demand full empowerment and a work-from-anywhere working pattern and want to work full-time from home.

As the JLL research shows, without careful management frequent remote working can have a negative impact on workforce morale and productivity. But with over half of employees falling into the Experience Lover and Wellness Addict profiles, the challenge for employers will be finding the optimum balance of remote vs office work to maintain engagement, commitment and satisfaction.

While they navigate this hybrid model, employers will be looking for support from space providers that have the flexibility to meet their needs today and in the future.

Boom in US Office Space Demand

An article in Globe St this month showed significant improvement in US demand for office space. The national VTS Office Demand Index (VODI), which tracks in-person and virtual tenant tours of office properties, showed strong increases in January and February and is now 38% lower than it was just before the pandemic – a significant improvement on the position in May 2020 when it was 85% down on pre-pandemic levels.

It was also encouraging that February also saw the first month since October 2020 where demand increased in all office markets tracked by VODI, with New York City, Seattle and Washington D.C. leading the growth.

The Resilience of Commercial Real Estate During the Global Pandemic

Nuveen recently published a report on the experiences of commercial real estate during the global pandemic and offered their near to medium-term outlook for the industry.

When it comes to impacts on the office sector, Nuveen comment how the trend of densification had taken hold pre-pandemic. Figures show that in recent years average space allocated per employee had shrank from 250-300 sq ft to as low as 100-120 sq ft. Nuveen suspect, therefore, that this trend will come to an end and that many companies (during the process of planning how to adapt their work environment) will allow for more space per worker in the future. They believe this will mitigate any decrease in demand for office space brought about by work-from-home arrangements.

Flexible Real Estate: Demand Will Grow and Tech Will Be King in 2021

An article this month in Globe Street cited recent research from Colliers that suggests “2021 will be the year that non-CBD flexible workspace supply increases dramatically”.

This sharp increase in demand is expected to come from occupiers who are seeking to offer a range of geographic locations for their distributed workforce. Increased supply is predicted to come from both existing operators as well as new entrants to the market which could include repositioned retail and hotel assets.

It’s also noted that “tech will be king” in 2021 as occupiers need to execute on what they call “occupancy strategies”. As a consequence, Colliers expect partnerships between landlords and providers to increase as the year goes on.

Are Landlords becoming Service Providers?

We kicked off February by hosting a virtual roundtable as part of SPACE UK; the event focusses on exploring big ideas and new business models for the commercial industry. Our table discussed why landlords are adopting more of a service provider mindset when it comes to managing their assets and what this means in practice.

Our CEO, Mark Furness, hosted the roundtable and participants included thought leaders from Great Portland Estates, Tishman Speyer, M7 Real Estate, LandSec, The Collective, Runway East and British Land.

You can view the roundtable recording and hear what our industry participants had to say.

The Future of the Office

With 2020 in the rear-view mirror, there’s reason to be optimistic about the year to come. A vaccine roll out is underway, surely to bring a boost of morale to communities around the world, and an uptick in workers trickling back to their offices. While the return to a full five-day week in the office is unlikely in 2021, the silver lining of the global coronavirus pandemic has been the market opportunity left in its wake.

Instant Offices predicts a 21% growth in flex-space office supply globally. Where will this growth come from? The shift towards flexible office models has accelerated, causing landlords to look more thoughtfully at rolling out flexible propositions. Meanwhile, pure play flexible workspace operators are well positioned to grow and meet market demand. Of course, this will depend on how well they’ve planned for the rainy day.

For both market players, the writing is on the wall. There is the need and the enthusiasm to drive the workplace experience into its next phase of evolution. Flexible is the future of the office and occupiers are at its core. Those who are positioned to clear complex operational hurdles and adapt to tenants’ evolving requirements will undoubtedly see the light at the end of the tunnel.

Worker Choice is Key

Real estate guru, Dror Poleg, shared his insight on the office market in a recent New York Times article. The office will become “more dynamic than ever”, he writes. The expected change is being driven both by where people choose to work and the consumerisation of the office. Poleg emphasises the importance for space providers to adjust to the new era of worker choice.

Positive Long-term Outlook

In a recent CBRE occupier survey, 86% of respondents consider flexible office space as a key component of their real estate strategy and portfolio plan up from 73% less than a yea ago. The latest North America flex office report identifies the case for optimism within the market as 2021 gets underway.

Perseverance and adaptation are essential during the continued pandemic. Key indicators for resiliency will be a space provider’s ability to deliver on new office requirements and evolve existing business models to meet demand.