A personal view of the evolving role of real estate in a world of technological, social and business change, by Richard Pickering, Chief Strategy Officer, UK.
We might be about to see the most radical shake up of real estate in modern history; but it isn’t about coronavirus.
Some of you reading this article have been working from home for the past month. Most of you are doubtless itching to get back to normal? Perhaps it¹s not that simple. Sure – most of us want to go to the pub, visit our friends and family, have a face to face chat with our colleagues, and walk down the high street unafraid of catching a deadly virus. However, most of us, it transpires, do not want to get back to normal. It turns out that there were a lot of things about normal that we all found increasingly unacceptable, and in respect of which we have no desire to turn back the clock.
A recent poll by YouGov found that only 9% of Britons want life to return to how it was after coronavirus passes. This is understandable. As a society we are working longer hours than in recent history. This is particularly the case in professional services and in London where hours have increased significantly since the financial crisis and where the amount of people working excessive hours has increased by 15% over 5 years.
We also spend more time commuting than ever before and at the highest ever real terms cost. Accordingly, we have less time to spend with our families. And we when do, we are spending more time alone-together, where there is no interaction (43% increase in 15 years), mainly driven by increased screen time. As a society, religion has all but collapsed (1% of young people now identify as Church of England), and we have lost a significant sense of neighbourhood and community, driven by transience and the creation of dense, impersonal environments. Excessive consumerism has continued to rise, and in the age of social media, conspicuous consumption plays a part of daily life. Salary-to-house-price multiples are the highest ever (UK x8; much higher in our big cities), with 40-year-old first-time buyers no longer being unusual, and some left as permanent renters. If that wasn¹t enough, we are being told that we have 10 years to save the planet for permanent environmental destruction. So, no; normal was starting to look a bit rubbish.
Compare these ills with our present conditions. In spite of lockdown, 39% of people are in fact catching up with friends and family more often. 40% say they have witnessed a stronger sense of local community. 23% say that their relationship with their children has improved. 61% of people say that they are spending less money needlessly. About half of us have adapted during this period in a way that we find acceptable. And pollution and carbon emissions have dropped considerably, conferring health benefits and helping to save the planet. As long as we can continue to pay the bills, this doesn¹t seem to be such an awful outcome.
To pay the bills requires working, and for this reason the focus of government rhetoric in the UK in the past week has been on how we get back to work. But let’s not be under any illusions given social distancing requirements this will be far from normal. Initial reoccupation densities are ~25% of typically pre-existing densities; meaning that in the short term 75% of workers are likely to remain at home or need new space. For those moving back to the office, proximity will be limited, communal areas will be restricted, pedestrian flows will be regulated and a host of other controls are likely to be introduced like screens, masks, cleaning etc. All of this assumes that one can get to office safely, which carries different challenges.
Right now, organisations are reviewing what will be a very changed office environment and making their own conclusions. For some businesses, or some segments of their workforce, being in the office is essential, and they will implement and adapt accordingly. However, others may conclude that in the short term the office offers little benefit over home working and for them the status quo will likely remain for some time. We see this in a series of corporate announcements this week stating that back-to-work will be limited whilst these conditions persist. But how long might that be?
It is easy to project the here and now forward forever; but perspective is helpful. Most seasonal flus started in a more virulent form before their effects were in relatively swift order lessened by mutation, vaccination, herd immunity, treatment and effective suppression. The Spanish flu lasted 2 years, and whilst some descendent strains still circulate to this day, its impact on society dissipated relatively quickly and is now essentially forgotten. Whilst we don¹t know whether the same will be true for COVID-19, that is nevertheless the lesson from history.
However, much more significant than the choice of whether to go back to the office this year, some organisations are saying that they might never go back in the same way. Is this the e-commerce moment for offices? Coronavirus is not a driver for long term change. It is merely a light that is shining on the inadequacy of much of our real estate; now in the context of an evidenced viable alternative.
The scorecard for real estate reads must try harder, but this is not just an investor issue. Most occupiers have been talking a good game about using real estate to attract talent, but this often amounts to lip service. Too often, once the talent plan lands on the CFO’s desk, it becomes sacrificed for a more certain cost saving. If occupiers aren’t prepared to put their money where their mouth is, investors can’t be criticised for failing to react.
The interesting thing about this crisis is that homeworking potentially provides a vehicle to resolve all of this; for the employee, for the corporate and in the longer term for the real estate investor. Removing a significant element of the workforce from the office at any time will elicit a saving for occupiers that can be partially reinvested in better offices for everyone else, driving better staff productivity and happiness whilst still being net down on cost. In the short term, a reduction in spatial demand would soften rents. However, over time, as occupiers invest more per unit area in their offices, opportunities still remain for investment growth, particularly on a segmented or asset level. Such a shift would sift the wheat from the considerable chaff of weaker office products that do not play to evolving occupier needs.
All of this poses a significant dilemma for developers. What should you build right now? For many, the answer is probably nothing, but doing nothing comes with its own issues. Some will now be looking at designing for the immediate issue of coronavirus. That would mean low densities, outside city centres, cubicle offices and functional amenities. However, this feels like the antithesis of what occupiers have been asking for consistently for the past 10 years.
Each developer will need to make its own call based on unenviably unclear evidence. However, for those that believe that COVID-19 has a horizon of 2 years or less, building anything other than what occupiers want in the long term feels like a recipe for disaster. Divining what the long term looks like also now carries greater risk, but increasingly the smart bet envisages the role of the office as part of a new omnichannel work environment, where the office is one of many work locations, with a distinctly differentiated role in that wider value chain. It¹s no longer good enough to build an office for tasks that could be done remotely. There has been a step change this year in that regard.
Ultimately, how the industry comes through the present period should not be judged on how many people return to the office in the coming months, but how both occupier and investor hasten their response to a new normal that has been on the cards for some time.