Hybrid working transforming commercial property market

A lack of commuting, the comfort provided by informal clothing and plenty of free time signalled that the office would surely become a thing of the past.

As the lockdowns were extended, however, it became clear for many of those same people that the presence of kids, pets, and household chores are not exactly conducive to productive work, and the lack of contact with colleagues and bosses can make one miss out on important career opportunities.

Out of this mixed bag of experiences has emerged hybrid working, a system where people split their shifts between office and home, and which have been adopted by companies of all sizes around the world.

At least one sector of the economy has sighed with relief with this Solomonic solution. Commercial real estate companies went from fearing that their office buildings would be abandoned for good to being optimistic about keeping significant chunks of their corporate clients. However, the sector is bound to go through important changes in order to remain relevant in a post-pandemic world.

The reality is that, if companies don’t completely withdraw from their offices, they are very likely to demand less real estate space in the future. A recent survey by Morgan Stanley with US companies revealed that around 13% of office space rented in the country should be given back as current contracts come to an end. Another study, commissioned by the Building Owners and Managers Association International, BOMA, found that a majority of office tenants will reassess their necessities of office space, and 37% of them expect to rent less of it in the future.

“Real estate companies have lease contracts that run for several years, but, as these contracts end, they will likely see alternatives to current arrangements,” said Edwin Kuhlman, the head of the Global Commercial Underwriting team at Atradius in Amsterdam. “They may find it hard to lease the space for the same prices, or they may lose their tenants as companies move to smaller facilities.”

Even retaining a reduced level of demand from current tenants should require a lot of effort as well. Changes brought about by the pandemic and the accelerated digitalisation of organisations mean that landlords will have to adapt their premises to new ways of working. The cubicles-based workspaces of yore are expected to move towards oblivion, while shared spaces come to the fore. Many employees will come to their companies’ HQ to brainstorm and socialise with colleagues as much as to do actual routine work. Tenants will want buildings to be prepared for the next pandemic by offering safety measures such as the installation of more efficient air purifying systems.

“Most organisations will require a mix of collaboration, meeting, and focus space, in addition to spaces that encourage informal social interactions,” states Microsoft in a recent report.

Where this whole process is going to end remains in question as many different alternatives pop around. Some companies have embraced a model called hub and spoke, where a central office concentrates a number of functions like high-level meetings and training, while working teams meet in satellite offices located in less expansive locations. Others are seriously considering establishing middle- and back-office workers, which need less interaction with other parts of the company, permanently at their homes to reduce spending on real estate. Suburban co-working spaces are an alternative for employees who neither want to stay at home or relish the idea of enduring a busy commute to the office every single day. And companies that work in complementary sectors, such as banking and insurance, have experimented with the sharing of premises in a similar way that retailers have done for decades in shopping malls.

“We should start seeing more significant changes as leases come up for renewal and companies reassess whether they need the same footprint,” said David Culotta, the head of US Buyer Underwriting at Atradius in the US.

The transformation that real estate companies need to embrace will vary, however, depending on the markets where they operate. Research by Steelcase, an architecture group, has found that workers in countries like Germany and France are much less likely to opt for home working, while their Mexican and Indian peers express just the opposite tendencies. In some economic powerhouses such as Amsterdam and Madrid, real estate companies have started to reconvert commercial properties into housing units, which are much more needed than offices in those crowded metropoles.

“The transformation of commercial buildings into new housing complexes or apartments is something that we shall see more often in the next few years,” Kuhlman said.

Other after-effects of the pandemic, like the violent recovery of consumption and production after the depths of early 2020, can even create opportunities for landlords in different real estate sub-sectors. For instance, warehouses are in high demand in several parts of the world.

“Some of the issues we have seen related to component availability, Covid-19 and tariffs have led companies to re-rationalize how they view their supply chains. Supply chain diversification and a move away from “just in time” inventory are gaining momentum given breakdowns in existing supply chains.  At the same time, the boom in e-commerce as result of the pandemic has led to strong demand for industrial real estate, specifically warehouses/distribution centers. Culotta concluded.