• Sam Faheem

The New Normal? Assessing the Impact of Flexible Working on Office Real Estate Markets

The US Bureau of Labour Statistics reports that nearly 50 million workers in the US stopped commuting and switched to working from home during the spring of 2020, resulting in an 850% increase in homeworking. Early data suggests these trends are here to stay, with companies expecting approximately 40% of employees to utilise a remote working model in the future. Recent events have caused widespread concern among investors in the office commercial real estate space, with the asset class historically being popular for low-risk investors.

The impact of remote working on the value of office real estate is hotly contested in industry research and by real estate academics. There are two main issues to be discussed: the extent to which the flexible working movement impacts commercial real estate, and how much the movement will continue post pandemic.

The impact of flexible working:

The pandemic has accelerated a range of pre-existing trends in the commercial property sector, including the flexible working movement, rather than created them. Early statistics on the impact of flexible working are concerning for investors – a survey by ARUP suggests a 20% decrease in the number of days staff will spend in the office post-pandemic, with European office take-up down 40% year-on-year in 2021 and 13% in Q4. However, anticipated rental declines have mostly failed to occur when measured using recent data. One issue is that it’s difficult to determine how much market trends reflect changing tastes, as rents are responsive to falls in expected growth. Taking the 2009-10 economic crisis as a guide, commercial property prices dropped by 8.8% in the EU on average in 2009.

One way to assess the potential impact is to look at investor sentiment. Real estate private equity fundraising slowed dramatically at the start of the pandemic, with capital raised per quarter more than halving from $40bn in Q1 2020 to $18bn by Q4 of that year (Figure 1). The extent to which this is a response to changing fundamentals or a by-product of uncertainty remains unclear.

A recent IPO could indicate what Wall Street thinks. Cian Plc is an investor relations company providing online real estate classifieds in the Russian market, ranking among the top 10 most popular commercial real estate classifieds globally. What makes its IPO notable is the number of bulge bracket banks involved, including Morgan Stanley, Goldman Sachs, J.P. Morgan, Bank of America, and several Russian investment banks. The willingness of investment banks to provide IPO services to a firm is less indicative of success than it was, say, 30 years ago – and Cian’s share price on the NYSE has fallen since the IPO in November. However, the interest Cian attracted from major institutions indicates the biggest names are still focused on commercial space.

This is with good reason. Real estate investors are emphasising that the main impact of flexible working will be a change in the way we utilise office space, not the amount of it required. One notable trend reversal resulting from the pandemic is that people have become more conscious of public health, demanding better social distancing in offices with more space. Offices are also increasingly being used as meeting and collaborative spaces, with the traditional desk setup rapidly becoming a thing of the past. This has led to office dedensification, with each employee occupying more square footage than before (Figure 2).

Further research by Cushman and Wakefield indicates that dedensification might offset some of the loss in demand caused by more remote working. For example, expanding the pre-COVID footprints by 50% per worker would fully offset the effects of increased remote work. Although dedensification is unlikely to occur to this extent, it may counterbalance short-term impacts from the pandemic. The same research report estimates global office rents bottom in Q1 of this year and begin appreciating from this point forward, returning to pre-crisis peak levels in 2025.

Will flexible working trends continue?

Early employee surveys on working from home indicated that just 10% of remote workers wanted to return to the office post-lockdown, causing concern in commercial real estate markets. However, recent research has found that there are long-term adverse consequences to working from home, such as an increase in musculoskeletal complaints and reduced productivity. There are definite advantages to flexible working, such as increased participation of women in the workforce and reduced congestion, and it appears that most employees value a mix of office and remote working. A recent survey indicated that 74% of workers subject to the strict Australian lockdowns would like to return to the office in some capacity.

Many large firms are also encouraging employees to return to the office, with Goldman Sachs and Netflix leading the drive on face-to-face meeting and office attendance. In the wake of the Omicron variant, an increasing number of firms are requiring staff to be vaccinated before they can return. Some companies are committed to returning to the office whatever it takes: earlier this month Citigroup announced it would be firing all unvaccinated US workers as a response to Omicron outbreaks. Although firms are changing what they want their office space to do, there’s no doubt that prime office real estate will remain highly prized among industry leaders.

Where do we go from here?

Outlook on the future of office real estate remains uncertain, with some investors in the space reaffirming their commitment and others scaling back or downsizing offices. Several performance indicators seem to have improved since the height of the pandemic, including capital raising for private equity investors and rents in prime office space. As the immediate impact of COVID lessens (new variants excepted) it will be interesting to see how many of the changes made during the pandemic remain for the long-term.


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