Covid-19 - Occupational markets: the great workplace experiment
Lee Elliott explores what we know, expect, and question about the future of occupational markets in the wake of Covid-19.
5 minutes to read
What we know
Lockdown is forcing the adoption of home working. Encouragingly, offices are now re-opening in China and South Korea - albeit with extraordinary levels of testing, but for the majority of office workers in Europe, and now the United States, lockdown is becoming a reality, as is the acronym WFH. As with any change management process, it is important to review the effects of working from home over the longer-term, but there is no doubt that the mobilisation of entire workforces towards remote working has tested business leaders and brought sharp focus to implementing and leveraging the technology platforms so essential to ensure operational resilience.
Occupier sentiment is coming under pressure. Business sentiment indicators are turning downwards as Covid-19 takes hold. The latest IHS purchasing managers index for the UK, which essentially tracks business activity in services and manufacturing– fell to 35.7 compared to 53.2 – the lowest level since the series began in 1990. In a similar vein, the latest data release on UK M&A activity reported a significant drop, although some mega deals were in evidence. Figures for March point to only 131 deals involving a UK-based company, compared with 447 over the same month a year ago. These kinds of indications are likely to lead to occupiers reaching for the pause button, both in the UK and in many global markets.
Corporate focus turns further towards financial resilience. Business leaders, having dealt with short-term operational challenges, are now starting to focus on building financial resilience, and in particular are racing to raise or preserve cash to underpin their businesses over the course of what is an indefinite crisis. Approaches are predictably varied, with some cutting capital expenditure, some selling assets, and others cutting dividend payments.
What we expect
Corporate real estate strategies will have to evolve. The need to preserve cash and hence reduce capital expenditure will inevitably have consequences for corporate real estate strategies. In Asian markets, which were first exposed to the crisis, we have seen those strategic relocation or fit-out projects that require significant capital outlay being placed on hold. However, given the paucity of supply in Asia and beyond, we expect occupiers to pause rather than cancel activities. Such behaviour is likely to ripple around global occupational markets, with occupiers continuing to strategize and plan but taking more time to transact, unless lease structures force activity.
We are also witnessing a growing volume of occupiers seeking rental concessions from landlords, although some of this may be opportunistic rather than forced by underlying business performance.
A nuanced picture will emerge at an industry sector level. The immediate hit to demand has negatively impacted sectors like hospitality but, given the rapid adoption of cloud-based technologies, the tech sector appears more resilient. Another positive example is life sciences, which will benefit from increased government expenditure on R&D. From a real estate perspective, the rise of the life sciences is fuelling activity. Manchester Science Partnerships, for example, have gained consent for the 125,000 sq ft fourth phase of its £150mn Citylabs life science campus and remains “determined to complete” the second phase currently on site and fully-let to an occupier actively involved in Covid-19 testing.
An influence on workplace culture and structure. The current situation represents the greatest global workplace experiment ever conducted. As companies move operations towards remote working, there have been many proclaiming (once more) that this ultimately will lead to the death of the office.
Whilst it is still too early to be certain about the longer-term impacts, we see the demise of the office as an unlikely outcome. Instead, in our view there will be growing recognition that the office is just one of a range of workplace settings.
As people are forced to work remotely and managers adapt to such a situation, remote working will become normalised and the fears that have to date constrained its adoption will be removed. This does not however lead to the death of the office. Instead, it expedites the path we have identified over the last few years namely, the move towards offices that act as social hubs for creativity and innovation rather than as centres for administration and menial tasks on a 9-5 basis. The workplace will become more dispersed, but the office will remain a vital setting. Long-term we see a continued flight towards quality space that provides its occupants service, amenity and a positive and engaging experience.
What we question
Will occupiers look beyond real estate costs? Although recognising the different characteristics of the GFC, a key question must be whether corporate real estate teams become deeply embroiled once again in a heavy corporate cost-saving agenda, as it was in 2008-10 or will real estate be used as a device to drive corporate transformation? Will occupiers learn the lessons of the last ten years and invest in real estate to support a wider or changing purpose, or will they revert to type and attack what is the second largest operational cost?
Can the co-working market ride out the storm? Social distancing may be the last straw for genuine coworking spaces that have multiple organisations on the same floorplate and operating cheek by jowl. Those operators who have taken on leasing risk, often at historically high rental levels, are facing evaporating demand. They are also facing uncertain futures as their investors come under increasing financial pressure. Something will need to give. How will the model change? Will flexible but managed spaces for the exclusive use of a single entity be the answer? Can operators move closer towards their point of difference and become pure-play operators working in partnership with conventional landlords who have the product but not necessarily the expertise in delivering service?
Is this the start of a new partnership between owners and occupiers? There is evidence that landlords are more pro-actively engaging with and listening to their customer during this crisis and then working to create solutions that support them, thus increasing the chances of retaining both the customer and the associated income. But, is this a case of simple crisis management or the long-heralded change to market traditions which have tended to be loaded in favour of the owner and have typically been misaligned to the operational realities and planning horizons of the customer. Will the aftermath of Covid-19 see owners develop a deeper understanding of customer requirements and a willingness to create solutions and services rather than simply physical products? If so, will valuers and lenders similarly adopt a new approach?