Offices have a strong future - or do they?
Chris Kane
Author, Advisor, Non Executive Director, Co-Founder Everythingomni. President London Irish Amateur RFC
Many people are making powerful and persuasive arguments for a return to the office. There is a lot of merit in getting us all back to “normal” or the “new normal” – cities need the business; people need to socialise, and landlords need the rent. I had little doubt that investors and property companies would strongly support this view, as I learnt from participating in a recent Urban Land Institute (ULI) debate on the topic. I was there to put some counter arguments to the debate that the office building has a strong future. Rather than debate a hopeless cause, I suggested that we need to consider the conditions required for offices to have a strong future.
To set the context I reminded the audience that whilst most parts of the economy has shifted from analog to digital, the supply side of the property market is lagging well behind the curve in harnessing the digital dividend. When you look at the leasing system it still retains much of its medieval roots. On the consumer side, enterprise embraced new technology as a business imperative. Cloud technology had the effect of liberating the office worker from the desk and many companies adapted agile working practices. The 2020 lockdown made it possible for most businesses to consider not only working from home but working from anywhere.
The office may not be obsolete but the system needs an overhaul
The central focus of my argument was that the office building per se is not obsolete but the system itself needs an overhaul. By system, I'm referring to the way we both produce and consume commercial real estate. We all need to come to terms with a new paradigm, one which is based on a shift from fixed to fluid and where the human taking centre stage. We're not entering the next Industrial Revolution but rather into the ‘Age of Human’; one based on distributed work forces working in a multi dimensioned manner and supported by distributed workplaces – omni-working.
As a first step the real estate sector needs to accept that there are fundamental structural changes taking place in the market. Many people talk about a ‘new normal’ and liken current market conditions to other market downturns. In my view not only has the game changed but Covid has also changed the stadium. Given the tsunami of changes facing all of us, may I suggest we all take a leaf out of a little book of less than 100 pages called “Who Moved My Cheese?” This motivational business story has sold over 28 million copies and describes four typical reactions to the changes in our lives and work, while providing some great insights into how people cope with and react to it. With the book in mind, I argued that the CRE sector should not run the risk of waking up one morning and finding that their cheese has not just moved - but disappeared altogether!
Key Drivers of Change
The nature of demand for space has changed irreversibly. The December 2020 Deloitte survey reported that 98% of CFO’s expect to see a five-fold increase in flexible working and home working by 2025. When it comes to understanding the drivers for this change in demand they can be summarised as:
· the lockdown proved beyond any doubt the viability of the WFH experience. The fact that the wheels didn’t come off has changed tenant expectations for ever. They are all asking what is the purpose of the office?
· The existing landlord and tenant operating system is cumbersome and unwieldy; especially as tenants and customers are demanding and needing more choice as never before.
· The current office building delivery system is also inflexible. Whether for a new building or an existing space – transacting, due diligence, fit-out – the processes involved take way too long.
Who is the customer?
I suggest that everyone on the supply side of the equation takes a long hard look at how to generate returns in this new paradigm. From a consumer perspective they see the supply side as costly, convoluted and confrontational. Two key questions should be part of this type of review.
· Do you really know your customers?
· Do you understand the customer journey from when they decide they need space to when they move in, as well as the day-to-day running of the building?
The time has come for fresh thinking and some genuine innovation
The last chance saloon
t is also important to consider the wider business context. Apart from contending with economic carnage, business leaders are also concerned about global warming and climate change. Given that commercial buildings account for almost 40% of all greenhouse gas emissions, this cannot be ignored as it is now an urgent consideration and one that the property industry must address. This was reinforced by ULI CEO Ed Walter who said: “climate change is already having a significant impact on the places where we live, work, learn and play, and recognition is growing across the real estate industry that now is the time to take action”.
Therefore, we all need to work together to rethink the office to create 21st-century workplaces which inspire employee engagement, foster creativity and increase productivity. While also improving an enterprise’s capacity to compete and create value in all its guises. By working together both producers and consumers of real estate can create effective and engaging workplaces which play their part in leaving a more sustainable ‘built’ legacy for future generations.
Suggestions to Ponder On
For a start I suggest the real estate sector might:
· Look beyond the building/ the asset / the design
· Adapt your thinking to the emerging new reality of ubiquitous choice
· Re-imagine offices: how they are funded, designed, built and operated in a smarter and more sustainable way.
Real estate cannot remain immune from the changes taking place today. Existing attitudes and perceptions must change as clinging on to the old system is rapidly becoming untenable. As Lord Foster said in an FT interview: “Covid-19 has up-ended long-established patterns of behaviour is…and…has brought us to a crossroads in the evolution of the office.”
I argued, at the ULI debate, we are now all entering a period of profound change and we have a responsibility to come up with fresh perspectives both suppliers and consumers that address the challenges of making the best use of the office not only for it to have a stronger future but for all of us have a better future. It seems that this line of argument resonated with the ULI audience.
Helping businesses & people grow within the real estate value chain
4 年Chris Kane you've summed up the demand & supply paradox brilliantly. In far fewer words than I could, and the comments reflect a real perspective on where the challenges & opportunities lie. There are attitudinal differences in drivers on both side of the supply & demand fence, and for global occupiers even more permutations & combinations given the cultural, social, professional & legislative differences they have to deal with. So never has it been more important to deeply assess the human need at the 'soft' end of occupier demand, against the reality of the generally draconian supply models for the bulk of available real estate. Some asset owners are joining the party & reviewing / revising their offerings to really treat the occupier as a customer, but the majority will take a while to stop seeing occupiers as a hostage in the ecosystem (harsh maybe, but that's how it feels) - any location with an over supply will be the target for a sea-change in the relationship, and that relationship as you say, will be founded on the experience & ethos the asset owners can support as part of their offering, including technology & sustainability. The whole ecosystem needs to get stretchy - break the traditional handcuffs of the single transaction - The term 'Space as a service' needs to more broadly span both owner, tenant & occupier sides, particularly relevant now the occupier is increasingly not the prime lease holder. I do sympathise with asset owners - they are being disrupted - they are watching their asset valuations like a hawk & shareholders don't like volatility of operating revenue. They have their assets, and they are going to retain them, so lease models need to exist. But just as occupiers are going to have to put capital into change, so are owners & investors in upgrading their stock, and overhauling that relationship to ensure the core offering of space aligns that human need of the core occupier talent poo, and the flexibility that will demand. That relationship & service has a significant value to the occupier, so all is not lost, and some are going great guns adapting to their markets. But back to my earlier point - the solutions will be different across the globe, all driven by a granular understanding of what works in a particular location. It will be complex for sure, but there will be core principles of similarity, with a balance found of the basic options for space, and how it is managed. In 1908 we could have any car as long as it was black, and a Model T Ford. We've come a long way since then driven by the auto industry's will to continuously evolve choices for the consumer - the real estate supply & demand model needs to follow suit. And this industry needs to come up with some answers - the paradox has been lingering for too many years. Great thought provoking piece. It got me going ??
Leading expert on creating award winning workspace. Bringing SME’s, higher education, councils & landowners together enabling business growth & positive change. Founder and Co-Owner of The Curious Network (TCN UK)
4 年Thanks Chris Kane for another interesting piece to challenge old conventions. TCNUK we've started to see the new trends gathering pace with occupier demands. As you say, fluidity and good old customer service is increasingly important along with spaces and work activities that are worth commuting for. It still makes me chuckle that we have to sit down in front of a solicitor and talk about an act from 1954 every time we want to sign a lease! That's changing, but boy has it been a struggle! The good news is that demand for workspace is there and companies are willing to pay, provided its for what they want. Dror Poleg is absolutely on it with the value becoming increasingly about the operator rather than historically about the asset and its scarcity value.
Civil Mediator, Advisory Board Chairman, Non-Exec Director, Member of Independent Monitoring Board (HM Prisons), non-practicing Solicitor.
4 年I suggested to my 24-year old daughter that WFH was GREAT and here to stay. WFH is great for those of us who are now bald and happy to loaf around all day doing Zoom calls in our slippers. My daughter is not so happy. She wants to (and I quote her here) "dress up, go out to work, then meet some workmates for a drink". She doesn't want to be fighting for bandwidth, or trying to find quiet / privacy to make difficult calls - in a crowded shared flat. So, personally I think that offices are here to stay.
CMAIO| Positive Disruptor for good | Founder: The AI Collective: from school leavers to Thought Leaders. Connector | Author | Influencer. On a mission to democratise responsible AI. Crafted 100 GPT’s in 100 days.
4 年A comprehensive and fascinating response. The implications of which will resonate far and wide. Maybe we will finally see that shift to city centre living and that much needed boost to the night time economy not yet experienced outside of London and a handful of other locations? I’d be interested to hear the views of other place makers such as members of Institute of Place Management
Corporate Real Estate Consultant
4 年Fantastic thought piece Chris! I am on the tenant side of CRE and every point here is spot-on. There is a certain inevitability with CRE becoming commoditized; yet the complexity of CRE transactions still necessitates talented and creative human thinking.