Rethinking the role of the office for a post-COVID world

Most companies are still figuring out how to balance this tectonic shift in how and where we work with making the most use of their physical workplace. The good news is that brick and mortar offices will still be used as much in future – just differently, says Rob Brook, Head of Alternative Investments & Logistics, PATRIZIA and a sponsor of its Future of the Office taskforce.

“COVID-19 has accelerated a lot of themes that have been around for a long time. It’s really more about a mindset change, from the office being a place where you have to go, to becoming a meeting point, a collaboration point where you choose to go.”

The real estate industry needs to consider how to best use this collaborative workspace to accommodate the hybrid workforce and offer an attractive work environment in the future. Flexibility, better technology, an emphasis on sustainability, versatility of use of office space and a winning design will determine who are the winners and losers.

COVID-19 may have upended the way people work but demand for office spaces isn’t abating. In fact, offices are still a preferred asset type for European-based investors, particularly those based in France and Germany, according to INREV, a European organisation that shares knowledge on the non-listed real estate industry.

What’s more, 84% of institutional investors and 78% of fund managers plan to invest in offices within the next two years, according to Investment Intentions Survey of ANREV, the Asian equivalent of INREV. Overall, investors expect only a slight decrease in demand for offices: 50% of investors surveyed believe that demand for physical office space will fall by a maximum of 10% over the next three years.

“In other words, offices will remain a core sector. Highly innovative industries clustered in big cities will demand an increasing amount of office space. Coupled with the relative undersupply pre-COVID, we think the outlook for occupancy and rents remains robust in many core markets across Europe” says Radu Mircea, Investment Strategy & Research, PATRIZIA, and chair of its Future of Office taskforce.  

Up to now, Asian investors have been cautious about the office sector, mainly due to uncertainty on rent and occupancy in the post-COVID world, says Wendy Lai, International Capital Markets, PATRIZIA.

A snapshot of the market shows sentiment has improved in the UK and Ireland, the Nordic countries, and Germany, but remains stagnant elsewhere. In Germany and Scandinavia, leasing activity has increased and is focusing on modern, sustainable office space which is in short supply. In contrast,  take-up recovery has been slower in France, Italy and the Benelux region so far. However, leading indicators suggest a healthy jobs recovery starting in the second half of 2021 which also translate into a rebound in office leasing activity.

Regardless of location, a few structural changes will impact the market going forward. Flexible lease terms are set to increase across the board and the increasing importance of quality space will place landlords’ capital expenditures (Capex) under stronger pressure than ever, especially in the United Kingdom and Ireland. “In London, in particular, there is a great deal of tenant space that is going to produce a polarised market going forward,” says Emily Cook, Asset Management, PATRIZIA.

Change is occurring faster in some markets, such as the UK, than others, meaning that in future, both a nuanced top-down strategy and a deep understanding of local market dynamics will be key for outperformance.

For sure, belief in prime locations won’t change. Top locations with solid transport options and a wide range of amenities will be in greater demand than before. Likewise, new winning locations may emerge, such as suburban areas with good train connections, as the city periphery becomes attractive, as well as the urban core.

To learn more about offices, download the report: The future of offices: 7 distinct trends to watch.