The future of the office was brought dramatically into question in 2020. As corporations emerge from their soul-searching missions, many have a fresh understanding of the contribution property can make to their business.
“Declaring that the office was dead was an attention-grabbing headline, and many companies are having to walk back on statements about never going back to the office because they realize what they have been losing,” says Robert Perry, president of the Americas real estate division at CBRE Investment Management. “The office has a future but as an attractor, a place that embodies and delivers the company culture. Investors are asking questions about what it means for value, and we have been building and using that playbook.”
Many companies have decided that employee well-being, exceptional amenities, high connectivity and sustainability credentials are vital ingredients for the modern-day workplace. The opportunity for office investors today is creating property that is fit and ready for a new era.
“Real estate is an employee retention tool and tenants are very interested in forward-thinking buildings that are healthy, have amenities and are in the right location,” explains Chad Phillips, global head of office at manager Nuveen Real Estate. “When we buy office assets, we do so alongside ensuring we have the capital to make that building special.”
Attitudes toward the office are changing, but this is happening against a backdrop of decline in investment in the sector. INREV’s latest Investment Intentions Survey reported that while offices form the largest component of existing real estate portfolios, the sector is less popular for new investment and likely to account for just 20 percent of capital deployed globally this year.
Repositioning for the future
Nevertheless, global investors remain interested in offices, says Richard Merryweather, joint head of UK investment at manager Savills. “Today, we are seeing investors seeking active management situations where they can add value; they are looking to reposition assets to meet the new requirements of occupiers,” he explains. “Occupiers will end up paying more [for offices] because there will be fewer office buildings around that meet their requirements.”
Investors with capital destined for the office sector are hungry for refurbishment opportunities that will create modern workplaces due to a scarcity of premium, institutional-grade stock, according to professional services firm JLL. Refurbishment activity will contribute 35 percent to 40 percent of European development activity as operators, developers and investors revive ‘non-compliant’ office spaces, JLL predicts.
Another drive behind repositioning assets is regulation. Emissions from construction can account for up to half of the carbon impacts associated with a building over its lifecycle, according to the UK’s Royal Institution of Chartered Surveyors. New developments are therefore only going to become more difficult to justify.
Brazilian real estate firm Safra Group, for example, recently failed to get plans approved for an observation tower in the City of London, called the “Tulip,” due to its “highly unsustainable concept” of using vast quantities of reinforced concrete. This is unlikely to be the last case of its kind; many countries have made buildings critical pathways to reducing greenhouse gas emissions, and embodied carbon is under increasing scrutiny.
While the push to net-zero carbon will be a long-term value creation opportunity for office investors, so too will the increased focus on health and well-being in the workplace. This could involve improvements to air quality and ventilation, rooms for exercising or quiet spaces, and green features such as gardens and living walls. Covid-19 expanded this concept from something associated with high-end leisure and co-working spaces to a fundamental function of everyday buildings – so much so that it has changed ideas of fiduciary responsibility.
So-called ‘healthy’ buildings are now a component part of how investors and real estate companies assess value, with extensive tenant demand seen across Asia, Europe and the US, according to a global survey of real estate investment managers by the UN Environmental Programme Finance Initiative, published in partnership with manager BentallGreenOak and the Center for Active Design.
The study found that fiduciary responsibility is taking real estate managers into new territory, one in which investment performance is dependent upon operational excellence and tenant engagement. Among respondents, 87 percent had experienced increased demand for healthy buildings, and 89.5 percent planned to enhance their company’s health and wellness strategy in the coming year.
“Future-proofing a building means focusing on the sustainability aspect of an asset and on user experience”
Allianz Real Estate
Furthermore, a 2020 study by the Massachusetts Institute of Technology found that across 10 US cities, healthy buildings attracted a rent premium of between 4.4 and 7.7 percent per square foot over non-certified healthy spaces. The report also showed nearly one in two building owners (46 percent) reported leasing their healthy buildings more quickly than their conventional properties.
BentallGreenOak is one real estate investment manager that believes promoting occupant health is integral to keeping buildings operational. Last year, the firm achieved Fitwel’s Viral Response Approval for 17 office buildings – the first-ever office buildings to claim this status in a number of cities across the US.
Demand for healthy buildings is evolving alongside occupiers’ environmental aims. To this end, BentallGreenOak has been adapting the Newport Tower in Jersey, investing $10 million in more efficient heating and air conditioning, low-flow plumbing fixtures, LED lights and motion-sensor-controlled lighting for tenant BNP Paribas. The bank has signed a 20-year lease renewal but has said it wants the space to become certified by the International WELL Building Institute.
A new lease on life
The increased focus on tenants’ experience is also extending to leases themselves. Landlords are finding that integrating flexible spaces into multi-tenant assets drives foot traffic, helps provide space to expand and avoids costly void periods.
CBRE IM provides leasehold options for tenants that support them through their lifecycle, from a start-up firm to an expanding operation. “A tenant may want a spec suite because they need space next week,” says Perry. “Then they may move to a flex space and finally a permanent space. Successful buildings will be those that can offer a variety of ways to respond to the changing needs of tenants through different types of space and lease durations.”
Rob Naso, managing partner at BentallGreenOak, agrees that shorter leases or leases with more flexibility are more common. But lease documents themselves are also getting simpler. He explains: “We have made the short-form five-page lease document available to make the job of doing a deal as quick and as easy as possible. Occupiers want to be in quick, turn up with their own IT and start work.”
This, he argues, is better for a landlord’s short-term cashflow.
Phillips says flexibility to scale up has always been of interest to small companies, but confirms the difference for office investors now is that large companies are asking for it.
“They want expansion options,” he says, “and they want those options for flexibility built into the lease.”
Alongside this, however, is the fact that many tenants are locking in long-term leases now, especially where buildings have been tailored to their needs. “We’re working with a tenant on a long-term lease, and doing a customized build; outdoor spaces, balconies and terraces, good airflow, a gym, walkability to local restaurants, lots of breakout rooms,” says Phillips. “Another key is seamless internet connectivity so people can go between office spaces and keep working.
“We have undertaken lots of repositioning globally and we have seen results. Our tenants and investors have seen [the] benefit of these transformations, while accretive activities will further improve value.”
Unlocking health with a digital key
A vital component of health and environmental features is the digital infrastructure to monitor the conditions of a building
Smart monitoring systems, data management apps and occupier platforms are crucial tools for real estate companies, as they can ensure factors such as air quality and lighting in addition to helping people build social connections.
Insurer platform Allianz Real Estate is employing proptech at a new headquarters for Deloitte in Milan, the 49,000 square meter Corso Italia 23, in which the firm has made major investment in customizable “smart ready” features. These include real-time monitoring of environmental conditions – technologies that are crucial for managing the experience of an office, says Donato Saponara, head of investments and strategic development, West Europe at Allianz Real Estate.
“We put in the right infrastructure to ensure high-end technology in terms of sustainability, to guarantee the best user experience, and that allows managers to better understand how the building is being used and how to adapt that building to make a positive impact on the environment and improve the experience for the tenant using that building,” he says.
“Future-proofing a building means focusing on the sustainability aspect of an asset and on user experience – these are the main changes in terms of value creation. The reality is that the tenant is not a company but a community of users and this is where our focus has shifted.”
Chad Phillips, global head of office at manager Nuveen Real Estate, agrees that smart management platforms are supporting tenants around health and wellness, and helping them keep on top of energy efficiency. Nuveen’s offices use occupier apps to help employees sign into the building more efficiently, book meeting rooms, engage in local community activities and track progress around recycling. Proptech also supports hotel-style customer service in the building lobby and beyond. Security staff are trained to show a friendlier face, and Phillips says Nuveen has been hiring people for concierge-style management for five years.