Office is by far one of the most traditional sectors in the Listed Real Estate (LRE) industry. Its history can be tracked for several decades, depending on the region, even longer than the creation of the FTSE EPRA Nareit (FEN) Global Real Estate Index itself.
This is a quite homogeneous sector across the regions, mostly thanks to the introduction of the REIT regimes in several countries using the USA regime model as the main reference point. Therefore, most of the differences among companies are related to the type of tenants, properties’ location, implementation of new technologies and specific economic drivers.
In the last five years, the sector has faced some interesting changes worldwide. In Europe, all the restrictions associated with the COVID-19 pandemic have pushed vacancy rates upwards and office take-ups downwards, forcing several landlords and tenants to redesign their corporate strategy and even to implement new business models, being flexible office space, mobility and working from home (WFH) policies some of the most discussed topics. However, some of these trends are likely to be temporary, while some others seem to bring significant changes to the industry in the long term.
Trending changes: Working from home and limited mobility
Remote-working or teleworking are not new concepts for workplaces; the COVID-19 pandemic is accelerating trends that were already underway for a while, and it is fuelled by WFH experience during the pandemic. The experts and business leaders expect an increase in remote working in the future, therefore possible impacts on workplaces.
A recent survey by McKinsey indicates that the potential for remote working is likely to persist in the wake of the pandemic, especially among highly-skilled, highly-educated workers in a handful of industries, occupations and geographies, such as finance, professional services, IT and telecom in advanced economies.
In terms of mobility, most European countries implemented strict measures (including full lockdown), and most companies adopted WFH policies during lockdown periods. Workplace-related mobility was adversely impacted by restrictions during the first and second waves, although a slight increase has been observed with deconfinement policies during the summer period.
According to Cushman & Wakefield, the share of people working permanently from home in the US and Europe is estimated to have increased from between 5% and 6% pre-COVID-19 to between 10% and 11% post-COVID-19, and significantly lower across Asia Pacific and Greater China where WFH is less common.
Globally, a total of 8.9 million m2 of negative absorption is estimated. Of that, 82% is related to cyclical factors – office-using job losses and coworking impacts – and the remaining 18% related to structural factors – an increase in remote working. The European office sector is forecasted to contract by 5.4 million m2. With the combined cyclical and structural impact, that increase in remote working is expected to reduce office demand by 0.95 million m2 during 2020 and 2021.
New workplace models and recent performance
Most of the companies foresee a hybrid workforce split between office, home and ‘third places’, giving employees the flexibility to choose; therefore, workplaces will evolve to address the changing needs of a distributed workforce as a hybrid model to redefine workplaces and the role of cities and real estate.
Companies will consider providing access to alternative workplaces, including home-offices, coworking places, satellite offices and the headquarters (CBRE, Colliers, JLL). It is also expected that some countries/cities/markets, such as London and Paris, will experience stronger structural shifts from an increase in remote working than others driven by higher residential prices, longer commute times, greater congestion and greater adoption of WFH (C&W).
There is no doubt that all these changes represent a big challenge for property companies, analysts and investors. The main question remains on how workplaces will transform to address a wide adoption of WFH policies in the near future and how this will affect the companies’ profits and value.
By the end of February 2021, the FEN Europe Office Index accumulated a total return of -26.9% compared to the precise peak on February 19, 2020. However, in the last six months, the same index has accumulated a total return of 15.3%, evidencing the initial overreaction observed in the market during the first lockdown, also making clear that the sector still has intrinsic value and shows interesting fundamentals for the future.
Right now, there is no clear consensus across the analyst on how permanent these changes will be, where most companies are rated as ‘neutral’ given the lack of certainty on most of their main drivers.
What is clear is that the function of the offices will shift away from traditional formats towards hybrid formats, where ‘flexibility’ and ‘digitalisation’ are key aspects for the future of the office sector; hence there will be plenty of opportunities for all players in this big game.
Bibliography and references
McKinsey Global Institute (2020). What’s next for remote work: An analysis of 2,000 tasks, 800 jobs, and nine countries.
Colliers (2020). Exploring the post-COVID-19 Workplace
JLL (2020). COVID-19 Impact: Offices will find a new purpose.
Cushman&Wakefield (2020). Global Office Impact Study & Recovery Time, Part 1.
EY&ULI (2020). Future of Work.
CBRE (2020). The future of the office survey (June, September)