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Working from home and the commercial property market

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The world is beginning to come to terms with the COVID-19 pandemic and the broad range of potential impacts for the Australian commercial real estate sector. Ultimately, the nature of human interaction during and post COVID-19 will impact real estate demand and drive change in some sectors.

 

When will people return to the office?

For the office sector, short-term shifts in demand will relate to how the virus outbreak continues to unfold and the extent to which employees feel comfortable returning to the office. More importantly for investors is how this pandemic will impact the long-term demand for office space. This will depend on the trade-off between the cost of occupation and the productivity trade-off between working from home (WFH) and working in an office.

WFH is not a new concept, especially for large corporate tenants that strive to provide flexible working arrangements for their employees. Until now, shared workstations (or ‘hot-desking’) has enabled employers to decrease their office space over time. The arrival of COVID-19 will further evolve WFH policies and has most employers thinking about what is best for their business. Many global firms have already announced changes to their WFH policies, and collaborative working technologies such as Microsoft Teams, Zoom, GoToMeeting and Webex have advanced in the wake of the virus-induced lockdown.

Notwithstanding these changes, several factors are likely to limit the impact on office floorspace demand. In the short term, workplace densities have decreased to enable social distancing. The longer-term trend of office densification could be reversed if organisations implement measures to mitigate the potential risks of future outbreaks. Shared workstations will be less appealing, and in some instances may even be regulated against. There are also many roles that are unable to be shifted to a home location for various reasons, including for security and insurance purposes.

Most businesses though, will have productivity and risk management at the centre of any decision about future office space requirements. WFH has never been trialled to this scale, and the productivity results and risk outcomes from this forced experiment will not be fully understood for some time.

 

Productivity and office design

Historically, providing well located, quality office space has been a means to attract and retain talent. Firms have invested large amounts of capital on office fit-outs to promote productivity and enable higher office densities (i.e. more people per floor). Studies have found a very clear relationship between indoor environments and employees’ attitudes, behaviours, satisfaction and work performance.

A wide range of factors are taken into account when considering office design and include room temperatures, air and water quality, lighting, noise, layout of individual workspaces and workplace colour schemes, to name a few. Workplace design is not a perfect science, and the process to plan a new office building can take years and millions of dollars in design and consulting fees. New office plans typically look to quantify the behaviours firms want to encourage in their staff and team, building out one floor of an existing office as a test, and confirming or disproving its hypothesis that the design will prompt those behaviours.

Organisations in Australia and Japan were found to have the greatest investment in workplace design globally. The WFH/office trade-off will be influenced by the level at which these factors of productivity gains can be replicated in a home office environment.

 

Collaboration and creating a buzz

Over recent years, organisational analytics software has been used to better understand how teams interact. A study conducted by Humanyze revealed that people on the same team were six times as likely to interact if they were on the same floor in a building, and people on different teams were nine times as likely to interact if they were on the same floor. While undeniably cost-effective, remote work tends to significantly inhibit collaboration, even over digital channels. Thoughts can occur anywhere and in any environment, but offices generally bring out the best innovating and ideating. The energy and buzz that comes from being in the same physical space is hard to replicate virtually.

Other benefits of working in an office include team-building, bonding, relationships, talent mentoring, corporate culture building, efficiency, management oversight and creative collaboration—all things that contribute to the entities' corporate culture.

We believe many businesses will consider these aspects as well as allowing employees to WFH. Leaders understand workplace culture isn’t about individual performances, personalities or attitude. It’s about how the team works together as a cohesive unit, and this is hard to create remotely, especially when building a new business, going through a period of growth or dealing with complex events.

 

Business clusters

There is a close and complex relationship between a city’s built environment, geography and economy, and quantifying the benefits of industry clustering was first noted as far back as 1890.

The concept of ‘knowledge spill over’ is well recognised as workers and business are likely to learn from one another when in close proximity. Business clusters, for example Silicon Valley, have traditionally played an important role in forging and shaping these networks, by encouraging the sharing of knowledge, generating social capital and, in turn, driving regional growth. An important WFH consideration here is how digital networks can replicate these relationships or contributing events like an ‘accidental encounter’. There will be a continued need for industry-wide networking and collaboration opportunities.

 

What to expect

 

1. Greater workplace location flexibility

Some firms will continue to expand their WFH capabilities, with workplace cultures and technology potentially providing further flexibility. When COVID-19 occupancy restrictions are fully eased, we anticipate that certain firms could move to arrangements such as a one-day-from-home strategy. However, we expect this to be an extension of the office workspace rather than a direct substitution of location.

Importantly, these solutions may not have a direct impact on office footprints. Many flexible work strategies were traditionally implemented through ‘hot-desking’ solutions, with buffer workstations required to deal with spikes in demand. Strategies had to account for ‘peak’ demand periods. During certain occasions, employees would come into work to find no free desks available, while others would spend valuable time searching for a free workstation. This was inherently more complex in larger organisations, where establishing exact workstation requirements was more challenging. The lagged and disconnected nature of exact headcounts, particularly for firms with a higher prevalence of consultants, casual labour and diverged business units, pose greater challenges.

 

2. Flight to quality

The new environment will likely drive polarisation across the office market, with a reduction in office demand for lower-grade and peripheral office assets. Given the absence of a broadly available vaccine, leasing conditions in the near-term will be more challenging for lower-quality office buildings, and assets with smaller floorplates, poorer ventilation systems, shared facilities and less appealing amenities.

This compounds the typical divergence that occurs during an economic downturn as higher quality office assets typically benefit from having better quality tenants, longer leases that extend through periods of volatility, and locations that attract staff and profitable business clusters.

 

Moving forward

Given the long-term nature of office leases at Charter Hall, any potential impacts to office demand arising in the short term will be somewhat muted, with long-term impacts managed in advance. Over 70% of Charter Hall's Direct Office Fund (DOF) and Direct PFA Fund lease expiries are longer than seven years.

We believe that WFH will complement the traditional office set-up, with issues such as productivity, risk management and the creation and progression of company culture all being key reasons why the office environment will continue to be an integral piece of business infrastructure over the long term.

Steve Bennett is CEO of Charter Hall's Direct Property business. This article first appeared in Firstlinks, a Morningstar publication. Analysis as at 6 August 2020. This information has been provided by Firstlinks Pty Ltd (ACN 161 167 451) for WealthHub Securities Ltd ABN 83 089 718 249 AFSL No. 230704 (WealthHub Securities, we), a Market Participant under the ASIC Market Integrity Rules and a wholly owned subsidiary of National Australia Bank Limited ABN 12 004 044 937 AFSL 230686 (NAB). Whilst all reasonable care has been taken by WealthHub Securities in reviewing this material, this content does not represent the view or opinions of WealthHub Securities. Any statements as to past performance do not represent future performance. Any advice contained in the Information has been prepared by WealthHub Securities without taking into account your objectives, financial situation or needs. Before acting on any such advice, we recommend that you consider whether it is appropriate for your circumstances. This article does not reflect the views of WealthHub Securities Limited.