Great uncertainty remains about how companies and their employees will use office buildings in the future. To examine this important topic, ULI and The Instant Group partnered on a research project in Spring 2023 to assess how changing occupier behavior and broader macrotrends are influencing demand for workspace.
The research involved a global survey of the key decision-makers for office occupiers and landlords. The survey was complemented by a series of interviews and roundtables with industry experts. The results from the study revealed that just 14 percent of occupiers believe their existing workspace portfolios align completely with their business objectives and strategies. However, offices still play a key role in occupiers’ workplace strategies to convey their corporate culture, stimulate collaboration, and mentor new and younger team members.
State of flux
Structural shifts in the occupier sector and concerns regarding obsolescence mean office investment has fallen to its lowest level since the 2008–2009 Global Financial Crisis. Offices’ share of total global real estate investment has fallen from 34 percent in 2019 to 23 percent in the first half of 2023. Since 2020, the living/residential sector has supplanted offices as the leading sector for real estate investment, with a 27 percent share.
Around the globe, worker presence at the office varies, but for many sectors and cities, office occupancy remains below pre-pandemic levels. The shift to more hybrid—where employees have a mix of time at home and in the office each week—and flexible working patterns has proved to be the most enduring impact of the pandemic.
Measurements of physical office occupancy vary, but according to data on access swipes to enter buildings, the European average is around 55 percent and the United States averages 47 percent. These numbers still leave office occupancy around 15 to 20 percentage points below a pre-pandemic average of 70 percent, which accounts for people traveling, or being at off-site meetings, or on vacation or sick leave.
Where workers have returned to the office, they often do so on a hybrid basis—with occupancy levels varying considerably during the work week. Consequently, in many markets occupiers are reducing office space as their leases come up for renewal, and office vacancy rates are rising. The global average office vacancy rate has risen from 10 percent at the onset of the pandemic in Q1 2020 to 16 percent in Q2 2023.
Adaptable spaces and services
Although great uncertainty remains about how companies and their employees will use office buildings in years to come, both office landlords and occupiers expect greater lease flexibility and agility in workplaces.
Consequently, the leasing relationship will need to become more of a partnership between the landlord and occupier.
Demand is growing for offices to be fit for activity-based working (ABW), which means providing environments for workers to do their different tasks in a fully optimized setting. Occupiers are appraising an office for its capacity to let them provide employees with a choice of settings, according to the nature of work they are doing, combined with a workplace experience that enables workers to use those spaces throughout the day. Businesses are placing significant value on a building that operates as a well-serviced social hub designed around functional and social areas.
What makes a high-quality office building today?
When it comes to office buildings, there are several factors that are now considered essential in the eyes of potential tenants. Attitudes toward space provision are adapting to offer a more human experience at work. Office occupiers are voting with their feet for better amenitized, more sustainable office buildings to deliver a higher-quality workspace for employees and engage with them. Location has always been important, but it is now more so than ever. A location that is well connected and is in a buzzy, cultural hub is one way that landlords can future-proof an office building,especially in the context of smaller footprints.
Energy efficiency rising in priority for office leasing choices
In addition to adapting workspace requirements to changing work patterns, companies are putting greater focus on the environmental credentials of the offices they occupy.
As occupiers and building owners look to reduce their carbon footprint, the use of renewable energy sources in office buildings has become an increasingly important topic. Buildings with greater use of renewables and such energy-efficient features as LED lighting, efficient HVAC systems, and solar panels can lead to a reduction in the overall operational occupancy costs by reducing energy expenses and maintenance costs associated with traditional energy sources. Additionally, buildings with sustainable energy systems have been linked to improved indoor air quality, and to increased user comfort and satisfaction.
Impact on values
As leases change, 62 percent of landlords expect a decrease in capital values with the current valuation model, which focuses on longevity of contracts and regularity of sustained rental income.
Landlords will increasingly need to consider new ways of monetizing value-added pay-per-use services and flexible contractual agreements enabling tenants to scale up and down their space requirements accordingly.
Office valuation and financing has historically been focused on traditional long-term contracts. As offices shift to become more operational in nature, with fluctuating income streams from different amenities and services, discounted cash-flow models could become a better way to value offices and ensure their long-term financial and sustainable viability.
While offices adapt to the shift in the world of work sparked by COVID-19, which looks set to endure, it is clear that physical workplaces still play a key role for businesses to attract and retain talent, convey corporate culture, and enhance employee productivity. However, occupiers have not yet fully worked out how much space they need and which types of spaces. As a result, they need a flexible approach from landlords partnering with them on this journey.
SIMON CHINN is an urban economist, and vice president of research and advisory services for ULI Europe.
