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What does the future hold for commercial real estate?

What does the future hold for commercial real estate?
 Pexels/Mihis Alex

To say the commercial real estate (CRE) sector has come under strain during the pandemic would be an understatement. 

First and foremost, the spread of the Covid-19 virus has forced offices, retail outlets and hospitality venues to close for long periods since the start of 2020, with many companies terminating their contracts with commercial landlords in this time.

It is unsurprising, then, that there were £8.9bn of sales recorded across retail development sites, stores and offices in London last year, which was down 30 per cent on 2019.

The wider CRE has bounced back well in 2021. Savills reports that £10.5bn was invested into UK commercial property in Q1 2021, which was 112 per cent and 14 per cent above the total turnover recorded in Q2 2020 and Q3 2020, respectively.

More generally, though, the pandemic has accelerated the movement towards flexible working. Already in 2019 as many as 70 per cent of UK employees felt that flexible working made a job more attractive, while 30 per cent said they would prefer flexible working to a pay rise. Many businesses were already alert to the importance and value of flexibility – be it the time or location of work – in attracting and retaining talent, as well as enhancing productivity.

The pandemic has catalysed this trend. A survey of UK businesses carried out by CBI Economics in July 2021 found that 93 per cent of businesses plan to adopt hybrid working models in the future. Only 5 per cent expect to work entirely from an office.

Here we see perhaps the most significant and, one would expect, lasting change from the pandemic. It begs the question: how will the CRE industry evolve in the coming years, and what can commercial landlords do to keep pace with this change? 

The outlook for the CRE industry

It is important to consider just how rapid the transformation of the CRE sector has been. After all, the first office lease transactions on record were signed in London in the 18th century. For around 300 years, very little changed. Organisations would sign leases for a dedicated workspace, agreeing the length of the tenancy and rental fees. 

From around 2010, this system began to change. Supported by the proliferation of business technology, companies began to consider new ways of working. And sure enough, flexible workspace operators such as WeWork started bringing out new offerings based on two core fundamentals: flexible size and flexible commitments. As noted, in the past two years, flexible working – built around a hybrid model of remote and office working – has become firmly established as the new normal.

This trend will not be reversed. Looking ahead, the CRE sector – or specifically office buildings – will change radically in line with businesses’ new ways of working. And commercial landlords must take note. 

The design, build, functionality, management and marketability of a commercial building will be driven by the demand for flexible working. This will mean workspaces that are less focused on having desks for all employees within an organisation, but more on collaborative spaces and an enhanced experience for tenants.