Pre-pandemic shifts toward smart buildings and campuses were well underway before 2020. The demands for higher levels of embedded infrastructure and greater lease flexibility have been accelerated by hybrid working models and a shift in health and well-being standards from “nice-to-have” to “essential.”
It’s too early to call the absolute impact of hybrid work on office space, but, according to findings from the EY Future Workplace Index, 87% of employers say the pandemic has changed the role of the office for their organization. The purpose of the office continues to evolve as employees and employers rethink why work should be done in a specific location. Some groups of employees — for example, those who work in a call center — may be far more productive working from home. Others — traders, for example, or those involved in client delivery — may need or prefer to work in a defined location, together.
What do these fluxes and shifts mean for commercial property owners? Some trends, already underway before 2020, are now driving market conditions. Expectations of commercial workplaces led by the architectural and amenity standards of big tech headquarters, have begun to shift responsibility for fit-out from corporate occupier to landlord. While a decade ago a landlord would say, “We provide the building: you do the rest,” that perspective has begun to shift as tenants demand higher levels of foundational infrastructure as a baseline requirement. Today, and tomorrow, advanced technologies that enable internet of things (IoT), facial and license plate recognition, data aggregation, and touchless entry and exit systems will be routine amenities.
The impact for landlords is clear. Those with legacy building stock, beset by aging interiors and old infrastructure, will struggle to find tenants. The era of commoditized office space is over, as corporate occupiers, in turn responding to the needs of their workforces, look to more open, flexible, and higher-quality options.
At the same time, few corporate occupiers are looking to sign inflexible leases that bind them to a specific space for one or more decades: instead, a lease of three to five years that offers flexibility to both upsize and downsize will become the norm. Shorter lease terms may also mean that tenants are less likely to invest heavily in the office infrastructure, putting increasing pressure on the building’s owner. For commercial office owners and landlords, the positive effect of higher investment and shorter leases is higher occupancy and enhanced rents.
There’s no shortage of quality corporate tenants for sophisticated and intelligent office space in prime locations, even in these uncertain post-pandemic times. For example, One Vanderbilt, a 93-story skyscraper in Midtown Manhattan that is one of the city’s most advanced buildings, finally opened its doors in September 2020 and is already more than 90% leased.¹ The 1.7 million-square-foot skyscraper combines a market-leading combination of amenities, innovative office design, state-of-the-art technology, high levels of sustainability and a healthy workplace environment together with direct connection to Grand Central Terminal.²
The four major drivers of workplace change that we discussed in our first article are shifting the business model for commercial property owners:
- Operational efficiency: an operational need for more effective use of workplace assets (increased utilization, improved actual use of space and reduced vacancy)
- Health, safety, and well-being: employee expectations for a better workplace environment (leading to improved talent attraction, recruitment, retention, and productivity) and changes in work patterns post-pandemic (hybrid work); employee and investor interest in workplace well-being certification (WELL Building Standard®)
- Sustainability: a business need for lower consumption/higher efficiency and better environmental credentials supported by government initiatives
- Human experience: the maturity, availability, and cost of advanced, integrated technologies to monitor, manage and enhance the workplace experience (e.g., IoT, facial recognition, visitor management, immersive collaboration, and data analytics)
Operational efficiency
While there’s a good deal of discussion about permanent changes to how and where work is done, with the potential for radically reducing the need for office space, that talk isn’t yet translating into actions. Few corporate occupiers are now planning for one-to-one seating, but many are increasing the allocation of space per work point, incorporating more flexible workplace concepts that can accommodate different needs and functions, and thereby maintaining the need for the space that they have in place.
If landlords want tenants to maintain their commitment to office space, they will have to ensure that the in-office experience is attractive and the building’s efficiency, both in terms of space and energy consumption, is high. We are seeing a flight to quality. Newer buildings or ground-up renovations that offer plug-and-play office space are expensive to realize but are breaking new records for rental rates.
Health, safety, and well-being
COVID-19 has elevated expectations of healthy working environments, and we don’t see this changing. Employees increasingly have choices as to where they work, and if the working environment feels unhealthy or unsafe, they will stay home. Purified air, high ceilings increasing the volume of space and access to outdoor amenity space are all lasting trends. So, too, are touchless workplace solutions, smart washrooms, and the deployment of antimicrobial materials.
Third parties, such as the International WELL Building Institute, a global authority on healthy buildings, can help advise real estate providers. We don’t yet know how the functional requirements of office space will change in the long term, but enhanced health and safety standards will become mainstream.
Sustainability
As companies look to reduce their carbon footprint and demonstrate lower energy consumption, that pressure for efficiency and sustainability is pushing up to landlords. A 2020 review of the impact of green building certification (including Building Research Establishment’s Environmental Assessment Method (BREEAM) ratings and Leadership in Energy and Environmental Design (LEED) standards) on cash flows and values in commercial property, showed significant financial benefits to owners of more sustainable buildings.³ Rental income was on average 6.3% higher, occupancy 6% higher and sales prices 14.8% higher.
Human experience
The ultimate responsibility for providing an optimal human and workplace experience falls to the corporate occupier, not the landlord. Companies have different priorities and specific objectives for the experience that they want to provide to employees, guests, and visitors. That said, landlords still need to be aware of these shifting needs because the enablement of a positive experience will, in part, fall to them. Areas to focus on include systems that monitor and control congestion, both at entrances and throughout the building; advanced security systems; provision of hospitality-focused amenities for all tenants in a given building; and predictive analytics that can help tenants identify potential issues and take averting action.
The office as a destination: designed for hybrid work, health, safe and sustainable, flexible, and intelligent
We have yet to see which model of work becomes the norm after the pandemic. The EY Future Workplace Index found that 75% of respondents don’t plan to have one dominant work location going forward. Almost certainly, property owners will have to navigate a heterogenous model that reflects differences in sector, company preference and employee work styles. Investments in design, sustainability and technology are attracting marquee tenants. As offices shift from a mandated default to an optional destination, they will need to work harder, for the benefit of landlords as well as tenants.
