Written By: Joanna Turner
Joanna Turner of Canada Life Asset Management examines how property markets are evolving as a result of the global response to the Covid-19 pandemic
We have a tantalising opportunity to bring together the best aspects of remote and office working. Companies, employees and investors all stand to benefit if they can find the right mix.
The cat is out of the bag and there is no going back. In what is possibly the largest social experiment ever, the pandemic revealed that mass remote working is viable and that people want to do more of it. But not all the time. Lockdowns also served to remind us of the advantages of working alongside colleagues in an office.
Suffice to say that there is no shortage of surveys showing that many people now want to spend at least part of their time working remotely.¹ Results vary with age and occupation and may also be influenced by how questions are framed and coloured by survey sponsors’ particular angles. However, the direction of travel is clear – remote working is here to stay and a significant number of employees would like to combine remote and office working.
For them, the attraction of hybrid working tends to be a combination of better work-life balance and the promise of still being able to escape to the office. We are, after all, social animals. Offices provide a level of interaction that you just can’t substitute with remote working, such as genuinely immersive meetings and the “serendipitous creativity” of ideas sparked by a water-cooler encounter.
For employers, hybrid working opens up possibilities to create more productive and healthier office environments and increase employee satisfaction and retention. It is also an opportunity to attract talent from further afield, including people who may have been prevented from working as much as they would like by dint of their location or personal circumstances.
What will the office of the future look like?
Offices still have their future assured as places where people work, meet, collaborate, generate new ideas and instil corporate identity. Exactly what that will look like will depend on a number of variables, including the type of work carried out in a specific office, and company culture, which may itself be undergoing change as a result of the pandemic.
We are going to see many different experiments in hybrid working, the most successful of which are likely to be based on ascertaining what employees and employers actually want. To give just one example, classic sit-anywhere hot desking may not be appropriate if a major draw of being in the office is to connect with your team.
Instead of basic workspaces or cubicles, we’ll probably see more generous open spaces, better meeting areas, hot desking systems and more technology, such as videoconferencing facilities, along with ease of access for their workforces and leasing flexibility.
Technology will have a key role to play in making hybrid working a more seamless experience – and in providing a level playing field between home-based and office-based workers. We may only have seen the tip of the iceberg so far. Anyone for augmented reality offices or a fully immersive online VR meeting?² Given how quickly we all embraced Zoom and Teams, this might not be such a daft idea; office designers may need to consider how to integrate technologies such as these into their plans.
There will also be more focus on providing wellbeing features, which are, broadly, anything that makes for a more pleasant and healthy environment to work in, and thereby enhances productivity. That can include better ventilation, natural lighting, collaboration space, food facilities, concierge services, cycling facilities, showers and design that creates a sense of space and calm. Having a great work environment can reduce employee turnover and increase tenant satisfaction and retention.
What does this mean for property investors?
Offices are a cornerstone in any diversified property portfolio, not least because they are a way for investors to gain exposure to many different parts of the UK economy. In our own case, offices account for approximately 54% of the LF Canlife UK Property ACS portfolio, where they perform a dual role – to provide income and also capital appreciation from active management such as renovation, improvement and lease management to increase rental value potential.
Having fewer people working in offices for a full five-day week could mean that the supply of office space will exceed demand over the short term, especially in secondary markets. However, for investors with the right exposure and approach to managing the assets, offices will continue to provide decent returns over the coming years.
Given that occupiers are likely to demand more flexible office designs to accommodate hybrid working, together with features such as air purification and higher standards of sustainability, we expect demand to be focused on the best quality grade A offices. Much of this demand will be in the city centres of the South East of England and the Big 6³ cities. Some regional city centre offices will also offer particularly good value as a result of the current government’s “levelling-up” agenda.
The LF Canlife UK Property ACS’s office investments are well-positioned to provide exposure to these areas, having a focus on city centre multi-let assets located in the London, South East and Big 6 markets, together with “knowledge centres”. These are towns and cities with strong links to universities or world-class science and research institutes that tend to promote innovation, higher employment and incomes and economic growth.
A further potential area of opportunity lies in local co-working offices or “Third Spaces”, to steal a marketing tag from Starbucks. These are essentially local flex-working/coworking spaces located in suburbs or towns, giving people the option to work in an office setting, away from the back bedroom or kitchen, but without undergoing a full-scale commute to a central office location.
Make it sustainable
Overlapping with the redevelopment of offices as healthier and more attractive places is the issue of sustainability. This is arguably now the biggest theme in property investing and one that will play out over decades. Investing in assets with enhanced sustainability, climate resilience and wellbeing aspects is set to grow markedly. As a result, it is now essential to consider ESG factors at all stages of the investment lifecycle, from acquisition to disposal, and have systems in place to monitor and minimise environmental risks in property portfolios.
Forbury Square, an office in Reading, is an example from the LF Canlife UK Property ACS of how it is possible to remodel existing properties to create better working environments with a focus on health and wellbeing. The refurbishment included indoor air quality monitoring equipment to track humidity, carbon dioxide, dust and chemical levels, together with PV cells and air-handling units to enhance the building’s energy efficiency and performance rating. Common areas were upgraded, with an enlarged reception, shower facilities, a drying room, secure bicycle store and EV charging. The building is now also Fitwel⁴ rated, and we are seeing increased occupier interest and achievement of higher rents as a result of renovation work such as this.
One Forbury Square, Reading
Time for hands-on property investing
One final point that should not be underestimated as employers and employees re-think what offices are for is that the days of “laissez-faire”, rent-taking property investment are almost certainly numbered. Real estate ownership has become a much more interactive and hands-on affair in recent years, and this trend has been accelerated by the pandemic.
It’s now essential for landlords and investors to work closely with their tenants and customers to understand their needs and preferences, how their businesses work and what kind of lease arrangements will work best for both parties.
The pandemic has transferred power to customers and occupiers, who now have flexibility about how, when and where they live, work and play. Landlords will need to respect their choices and respond to them.
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1. A survey by JLL of 2,000 office workers in 10 countries showed that most want to work remotely for two or more days a week, and that 75% of employees want to continue working from home on a regular basis. Furthermore, according to Salesforce, a whopping 43% of generation Z (currently aged 6-24 and soon to be the next wave of employees) prefer hybrid working, versus 26% of baby boomers and 33% of millennials.
3. Birmingham, Bristol, Edinburgh, Glasgow, Leeds and Manchester
4. Fitwel is a leading global certification system that certifies and promotes health and wellbeing in built environments.