The perfect storm of opportunity
Over the past three years, the corporate real estate industry has been collectively holding its breath.
The pandemic transformed our experience of work – for better or for worse – but many large companies have held off making transformational changes to their offices while they wait for the dust to settle.
In this piece, Mark Holmes, Mace’s Deputy Chairman, explores why 2023 looks to be different.
Economic uncertainty now feels for many people like a permanent fact of life – particularly in the UK, where the 2016 Brexit vote heralded more than half a decade of change that has been exceptionally difficult to predict.
Even without leaving their nearest multi-national trading bloc on unclear terms, the rest of the world has also been wracked with uncertainty; driven by populist policies, pandemics and unexpected economic shocks; whether that’s as unprecedented as a new war in Europe or as prosaic as a crashed super tanker blocking the Panama Canal.
That uncertainty has driven up risk levels and made it harder for organisations of any scale to commit to significant investment programmes – which in turn has meant occupiers and corporate real estate clients have been trapped into inertia.
During 2020, it felt like we heard little else apart from grand predictions on the death of the corporate office – but since then, little has actually changed. Most companies have kept their offices at the same scale, and pipelines for commercial office delivery have remained relatively stable.
At the same time, the changing nature of the pandemic, shifting economic performance and differing government responses made it difficult to develop a clear, global sense of how people are likely to work in the future.
Most companies, despite the vocal predictions, decided to hold their cards close to their chest – they may have tested new office designs, they might have sub-let a few floors or introduced new policies – but many decided to wait it out.
So what changed?
Two years on, and by and large, the preferred working pattern for most people today has emerged – if they can have it, employees want flexibility around when and where they work; and most will prefer to come into the office at most three days – more likely two.
Polling by the World Economic Forum shows that workers across the world are remarkably consistent in their views – the average preferred days a week spent in the office is 2.5, with no country polling above 3.4 days a week or below 1.9.
At the same time, employers have made peace with the fact that in a competitive talent landscape, that flexibility needs to be a core part of their offer – and that investing in smaller, high-quality offices is the solution to balancing costs with attracting people into the office.
So – a general consensus appears to have been brokered – but that doesn’t necessarily provide the impetus for companies to make major strategic decisions. So what will?
On the economic side, a number of factors are driving rising costs that are making it unsustainable for organisations to avoid rationalising their office estate. Rising energy prices are becoming a higher proportion of the overall budget for businesses – meaning empty and underutilised space is costing more than ever before.
At the same time, rising interest rates and double-digit inflation are making it more important than ever for companies to find savings and drive efficiencies – and for many big businesses, those punchy lease costs will be high on the target list.
The most recent PWC Global CEO Survey shows 85% of CEOs are prioritising reduced operating costs this year – and beyond that another 43% are considering hiring freezes and 36% are expecting to reduce headcount. Those headcount reductions and hiring freezes are in turn likely to exert pressure on firms reducing their workplace estates.
And, finally, there’s the real estate market itself. At the very top end of spectrum, the biggest firms have always carried between 5% and 10% of their portfolio as spare stock – to allow for flexibility in strategy – that now is entirely surplus to requirements, as inundated rental markets make it easy to find spare space at a decent price when it’s needed.
Political and social change is also driving similar behaviours. Energy costs are one thing – but investors, employees and other stakeholders are also now pushing towards a low-carbon future; and in turn many firms are waking up to the fact that their estates are where they can exert the most control over their carbon footprint.
Our own experience in the London office market tells us that premium, sustainable office space is in huge demand, while the appeal of older and less earth-friendly stock is plummeting; in turn risking developers being stuck with stranded assets.
There’s a certain irony here – new build office stock is only more sustainable than old stock if you ignore the embodied carbon required to build it – but savvy corporates will have seen an opportunity to reduce their carbon budgets, drop their office costs and invest in the kind of high-quality employee experience that creates attraction and retention for top talent.
Couple with better data than ever before on utilisation and costs – boosted by COVID technology investments – every economic indicator is suggesting that 2023 will be a huge year of change for workplaces around the world.
The perfect storm of opportunity?
Based on the arguments above, you could be forgiven for thinking that I’m sharing a pessimistic view of the future – all doom and gloom.
In fact, I think there is a tremendous opportunity on offer here; for workers all over the world, for their employers, the cities they live in and the planet itself.
If big companies get this right, they’ll set a better standard for workers all over the world – smaller, more pleasant offices that allow for the flexibility it turns out we’ve all always wanted.
As offices change, they won’t just get smaller – companies now know they’ll have to get more amenable to encourage people to spend more time in the workplace.
Employers, in turn, get reduced estate costs, more flexible workplace strategies, progress towards their carbon reduction targets and the ability to be more agile as the global economy changes and grows over the next few years.
And although empty offices may look like they could strike a body blow to cities all over the world, if leaders can respond quickly, they could prove a panacea for housing shortages in the developed world – or at the very least, offering up significant opportunities for regeneration as local spending rebalances between cities and suburbs.
Finally, the planet as a whole will benefit – as commuting becomes more sustainable, large office estates become less carbon intensive and our net zero goal gets closer.
For those actually managing the offices themselves – corporate real estate directors, workplace managers and those in charge of development portfolios – the next 11 months represent a massive opportunity to leverage the pressures above to influence employee experience, the bottom line and help save the planet – so what will you do?