Working out the future of the office

    Institutional real estate investors are still focused on prime locations, but the office might look different going forward.

    Months of enforced working from home have driven a shift in working behavior worldwide – a shift that employees, employers and real estate investors are still coming to terms with. 

    The concepts of homeworking, flexible working and hybrid working were not invented during the pandemic – some companies have been working flexibly for years – but the events of 2020 significantly altered the way people work and thus the workspace they require. 

    Frustratingly for investors in office real estate, a consensus for a ‘standard’ or ‘preferred’ method of working has yet to emerge. Trends vary depending on company culture, or the age, role and location of a worker. Older office employees, for example, are more inclined to work from home, as are those facing a difficult commute. Staff in densely populated Asian cities are generally inclined to work in the office, but even in Japan, working from home has become more popular: telecoms firm NTT, for example, declared this year that working from home would become the norm for its staff.

    Despite the uncertainty, prime office rents in gateway cities have remained resilient. CBRE’s Global Office Rent Tracker shows rents slumped worldwide in early 2020, but began to recover in early 2021 in some markets. By the second quarter of 2022, rents were rising in 13 of the 21 major global office markets tracked by the broker, and still falling in only five.

    It seems certain that flexible working is here to stay, which means fewer people at desks at any one time. But this also alters the original purpose of attending an office. Right now, then, the key questions for investors in the sector are: which locations provide the best opportunities, how much office space will be needed and what type of space will be required? 

    Quality over quantity

    Institutional real estate investors remain confident in established world cities that can attract talent with well-paid jobs and a good lifestyle. Robert-Jan Foortse, head of real estate Europe at Dutch pension group APG, says: “We have witnessed a flight to quality and expect this trend to continue in the future.”

    “…Gateway, high-density cities will remain magnets for talent and will be the most resilient in the age of hybrid working models”

    Annette Kröger
    Allianz Real Estate

    Indeed, MSCI transaction data for the second quarter of 2022 shows eight of the 10 largest deals in the quarter were for office buildings in major cities, including London, New York and Shanghai. Google owner Alphabet demonstrated its confidence in the sector by buying its New York and London headquarters buildings for a total of more than $3 billion.

    Annette Kröger, CEO Europe at Allianz Real Estate, says: “While the world has been radically changed by the pandemic, we continue to believe that gateway, high-density cities will remain magnets for talent and will be the most resilient in the age of hybrid working models.

    “Offices in the best central locations will benefit from public transportation, while office users will still want proximity to amenities such as nightlife and retail. Our office strategy has always been focused on ‘prime,’ referring to asset quality, location and user experience as well as its ESG credentials. And it is these types of offices that will continue to be in demand and therefore offer long-term value to investors.”

    More than ever before, office investors are focused on the end-user experience, with the user being the individual office worker. “We believe the office should be a better place to work than your own home,” says Foortse, “providing state-of-the-art technology, an appealing environment and a better choice in [food and beverages] than is offered by your own fridge.” 

    Another key advantage of attending the office is the opportunity for collaboration, he adds. “One of the main reasons why people come to offices is to meet other people, share knowledge and interact. Futureproofed offices will need to cater for that and have more meeting spaces in various shapes and forms than pre-pandemic.” 

    Kröger concurs: “At asset level, clearly location is still key. After that, the focus has to be on delivering the best experience for users in a sustainable way. This means creating workspaces that attract and retain talent, and which are conducive to high productivity and collaboration. This means flexible spaces, a mix of working areas and user services and amenities.”

    A healthy outlook

    Finally, the sustainability and health credentials of a building matter more to employees than ever before, meaning ESG considerations are rising up the agenda for office investors. “Technology can play a key role here,” says Kröger. “At Allianz Real Estate, we are deploying technology-based solutions that enable us to continuously monitor and optimize building operations, thereby ensuring ESG targets are met while creating a healthy environment for users. In addition, the data we collect from how the building is used can guide us in providing further digital services and amenities to users.”

    Foortse adds: “Futureproofing an office portfolio comes with a substantial commitment to ESG. At APG we use GRESB, BREEAM and more recently the CRREM pathways in this matter to help us futureproof our portfolio. We expect the flight to quality by occupiers toward the highest-quality buildings will contribute to increase the gap in vacancy rates between Grade A buildings on the one hand and Grade B and C on the other hand.”

    While the changing nature of work is a challenge, it can also be an opportunity. APG does not have a big allocation to offices in Europe, Foortse says, but the group is monitoring changes to the way people work to see if they can “provide us with opportunities to increase our allocation to the sector.”