Business for hotels and shopping malls, for example, has been devastated by slumping tourism and retail footfall, while logistics facilities have seen demand take off as online sales soar.
Elsewhere, though, the impact has been more ambiguous. For offices, rents in some markets have taken a significant hit, but asset values remain generally resilient as banks continue to extend credit and investors resort increasingly to traditionally safe-haven asset classes.
Still, while office sector fundamentals have remained relatively stable, under the surface the pandemic is acting as catalyst for profound change. In an industry notorious for its reluctance to embrace change, landlords are scrambling to adjust as tenant demand drives a revolution in the use, location, and layout of the workplace.
In a series of webinars held over the course of the past year, ULI brought together four panels composed of experts from across the region to discuss how local office markets are adapting to this new dynamic. This report summarizes the content of their discussions.
Work from Home
The most obvious driver of workplace evolution has been the widespread adoption of home-based working following enforced shutdowns of global central business districts (CBDs). What began as a stopgap solution, however, has now morphed into a successful experiment in corporate decentralization, with many projecting a secular decline in demand for conventional office space as a result. Opinions about working from home remain polarized, however, especially in the Asia Pacific, where COVID outbreaks have been relatively less severe and office shutdowns less pervasive. Among other things, panelists cited a longstanding cultural bias in favor of collective working, as well as the lack of space in smaller Asian homes, as issues militating against long-term adoption of remote working models. Bosses in traditional industries such as finance and real estate development are more likely to oppose remote work.
Nonetheless, there are signs that entrenched attitudes may be changing, even in markets seemingly least receptive to remote working practices. According to Dan Klebes, managing partner at BentallGreenOak in Tokyo, for example, “The enforced work-from-home [regime] that came in under the emergency measures has been a liberating opportunity for young people, and certain industries like the tech sector are now moving more towards work-from-home as a lasting arrangement.”
One or two days of remote working per week, therefore, now seem an acceptable compromise for most Asia-based companies.
With many employers now facing both lower revenues and a growing home-based workforce, there is increasing pressure for companies to consider setting up satellite offices–operated either internally or by third parties–in suburban sites closer to where employees live. This idea is far from new but is rapidly gaining traction.
While the appeal for workers is clear, in practice such hub-and-spoke facilities are often less efficient than CBDs, which tend by nature to offer the best-connected and most accessible locations. In some cases, though, the concept clearly works, as secondary business districts in Sydney’s Parramatta, Shanghai’s Hongqiao, and Manila’s Clark (among others) have proved.
The ideal site will feature good transport links, a high quality of life, and lower rents (both residential and commercial).
While few companies are likely to abandon CBDs altogether, the option of opening satellite facilities in strategically located hubs is expected to become an ongoing theme over the medium to long term.
Another way the pandemic is serving to drive change is in the way offices will be used. In the decade before the pandemic, per capita space in CBD offices shrank significantly as collaborative shared-desk environments became the norm.
Companies in the Asia Pacific were especially proactive in adopting this trend, with average workplace densities across the region averaging about 80 square feet (7.43 sq m) per desk in 2020, according to CBRE, compared with an equivalent of 100 to 150 square feet (9.29 to 13.93 sq m) in the United States and Europe. One upside to higher-density office layouts was that employers could save money by leasing smaller office spaces.
Today, however, health and wellness considerations are creating a mandate for safer building environments (through use of touchless access technology, for example) as well as less-dense workplaces. This might imply a return to the traditional, larger-office approach, but a more likely result is that the need for more elbow room will be counterbalanced by space freed up as companies implement hybrid in-office/remote-working models. As Stuart Mercier, Shanghai-based managing director of Brookfield Asset Management, observed: “The net impact is that I doubt we’re going to see a long-term drastic change in demand.”
If office space requirements therefore stay much the same, office fit-outs are likely to see some fundamental revamps. In particular, the old “activity-based working” model, whereby a large proportion of floor space was allocated to individuals working on discrete tasks, seems likely to be displaced in future by more collaborative layouts focused on team- and event-based activities.
As Paul Edwards, a general manager with developer Mirvac in Sydney, observed: “Task-oriented jobs will start to be taken over by computers and new, more human-centered roles will come to the fore, driving greater uptake of space around problem solving, creative thinking, and collaboration. It was always going to happen, but this has now been hugely accelerated by COVID.”
Other drivers of office design include:
• Demand for WELL ratings – a certification for buildings’ positive impact on human health and wellbeing–which will
grow among both tenants and investors.
• The need for technology to boost in-office efficiency, healthiness, and remote working capabilities. One panelist, for example, emphasized the need for AI-based technology to manage the timing of remote and in-office working, ensuring the optimal mix of workers in the workplace and avoiding scenarios where offices empty out on Mondays and Fridays.
• Office buildings that offer better services and infrastructure. This is partly because landlords have already been forced by the pandemic to improve their buildings and therefore have a better understanding of the possibilities.
In addition, employers need to use tech as a way to improve office utilization, bringing back workers who are now motivated to work from home.
In general, the emerging workplace model sketched out by panellists is one that is sophisticated, welcoming, and functional, leading to what some called the “hotelification” of the space. As Mirvac’s Paul Edwards observed: “There’s greater focus on experiences – that’s what will bring people back to the office – so we’re now creating environments that are just nicer.
Whether it’s about building a great ground plane, lift lobbies, green walls, or arrival and departure experiences that are seamless and frictionless, they aim to put a smile on your face as soon as you step inside. This is what hotelification is all about.”
Before COVID, demand for flex space in Asia Pacific cities was the highest in the world. Standing at 3 percent of total office supply in 2019, it rose to 4.2 percent by October 2020, according to CBRE.
However, with overcapacity already looming following years of overinvestment, concerns over COVID have led to sharp declines in flex space occupancy as users look to avoid crowded open workspaces. Co-working firms offering traditional open-plan spaces have been worst hit, while companies offering self-contained serviced offices have been relatively unscathed. According to Paul Salnikow, CEO of flex operator The Executive Centre: “We’re seeing a shift away from the open plan [model] because users are happy to share space with people they know, but not with strangers. In future, though, I think the pendulum is going to swing towards a hybrid model–modular workspaces for work that needs dedicated desk space, but access to collaborative space so you still have the opportunity to de-stress.”
Despite ongoing weakness in occupancy, as well as nagging questions about sustainability of co-working business models, panelists remained bullish on the sector going forward. In the short to medium term, demand will be driven by tenants’ need to reduce or increase floor space in times of economic uncertainty. Over the long term, demand will still be strong because the nature of work itself is changing, bringing with it increased need for optionality, be it overflow space within the same building, on-demand access to collaborative workspace, or co-working facilities in satellite locations of the same city to support work-from-home employees.
Another area of growing importance to the office sector is in the realm of environmental, social, and governance (ESG) factors. According to the 2020 Global Real Estate Sustainability Benchmark (GRESB) survey, Australia and New Zealand continue to lead ESG rankings in the Asia Pacific, with certified sustainability initiatives now the norm in all investment-grade office buildings.
Implementation of sustainable building features in other Asian markets remains patchy, though Singapore has emerged as a leader in energy efficiency in the high-rise sector. In particular, the recent introduction of its Super Low Energy (SLE) program aims to drive greater energy efficiency through implementation of new technology, including smart energy systems that use “internet of things” networking, big data analytics, and advanced sensors.
Such tech-driven initiatives are seen as the way forward in driving building efficiency gains given that obvious improvements derived, for example, from upgrades to lighting and air-conditioning systems have already been realised.
In Asia, it will be difficult to achieve the net-zero-carbon building emissions standard global investors are now eying given that regional cities generally have both warm climates and a large numbers of tall buildings (which are by nature energy inefficient). But the issue is today impossible to ignore because assets that fail to comply to baseline standards may prove difficult to sell in future, especially for investors with long holding periods.
As a result, according to Michael Long, head of sustainability for Asia at Australian developers Lendlease, “The caliber of discussions with investors is significantly changing, to the point where we are taking a much longer-term view on investment and financing decisions.”
At the asset level, investors are more interested in detailed performance data such as per-square-meter energy usage, how it changes over time, and how decarbonization is reflected in asset business planning and investment forecasts. Tenants, meanwhile, want to know about issues such as green leases, how the overall building performs in terms of sustainability, and how that aligns with their own corporate strategies.
One obstacle to eking out further gains in operational efficiency is engaging effectively with the multitude of different stakeholders within each building. Sustainability is a complicated subject, and neither occupants nor building managers are usually knowledgeable about the various components of net-zero-carbon strategies.
Internally, therefore, leasing and finance teams need to be trained and a new corporate culture created. Externally, building tenants have their own agendas that need to be addressed. As Ashley Hegland, a consultant working with Swire Properties in Hong Kong, observed: “We’ve been doing this a long time, but there’s only so much you can do as a landlord on the tech and data side, so you’re going to have to engage with tenants and other stakeholders to implement [sustainability initiatives] properly.”
Engagement with tenants can happen in a variety of ways. The biggest hurdle, perhaps, lies in identifying whom within the tenant organization to approach. This is no small matter when it involves communicating with multinational companies that often operate in silos, although dealing with commercial office tenants is usually easier than with retailers.
Landlords then need to devise a systematic and ongoing process that addresses a universe of themes ranging from energy to fit-outs to waste management to the intricacies of green leases.
The other big issue regarding implementation of carbon reductions is the role of regulation. In Europe, the rapid increase in real estate sustainability initiatives has been driven mainly by a slew of rules issued by the EU. In Asia, with some notable exceptions, governments have been slow to push through new regulation. This raises the question: should landlords wait for new rules, or should they act on their own initiative?
In considering this, both investors and landlords must bear in mind that, as more governments adopt the carbon neutrality commitments of the Paris Agreement, the pace of change for net-zero-carbon compliance is likely to accelerate. This is especially true in Asia, where authorities can be slow to embrace change, but then act in leapfrog fashion when they do, exposing the market to regulatory whiplash.
According to Lendlease’s Michael Long: “If an organization waits for legislation, that generally means they’re not prepared to change. Anyway, compliance doesn’t move at the rate your organization wants; it just moves. So if we wait for legislation, we’re on the back foot and it costs more to deal with compliance requirements when they arrive than if you’re strategically looking at where the market is going and thinking about how you want to play.”
Besides, at the end of the day, owners have to make it a priority to look at how changes to both regulatory and investor requirements impact long-term asset values. “It’s not something that was on your mind when committing to a tenant on a long lease 10 years ago,” Long continued. “You wouldn’t even think about their corporate objectives or whether they were decarbonizing. But now I have to wear the hat of being an investor in our own product, because ultimately we’ll be left holding that carbon liability or opportunity. So today we’re having to take a much greater consideration about who the tenant is. We need to be proactive and make sure the business is resilient to the coming changes.”