InvestmentsOct 13 2021

What does the future hold for commercial real estate?

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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.

Underlining this point, a Knight Frank study of UK businesses found that 81 per cent believe they need to implement a new workplace strategy post-pandemic; 53 per cent want their offices to have a greater amount of collaboration space; and 47 per cent envisage their real estate strategies to include a greater amount of flexible, serviced or co-working space.

If many employees are satisfied with working remotely, and therefore only commuting to an office once, twice, maybe three times a week, the experience on offer when they do visit their company’s workspace must be exceptional. The look and feel of the building; the technology that governs the use of the space; the sense of community; the meeting rooms and co-working facilities; and the additional networking opportunities or events in the building – these are no longer nice-to-have features, they are essential.

In the coming years, we will see an exponential rise in the number of flexible workspaces available. Crucially, however, these spaces will not solely be run by the existing brands we recognise (WeWork, The Office Group et al), but rather by commercial landlords that are converting traditional office buildings into their own branded flexible workspaces that suit the needs of today’s businesses and their employees.

For context, real estate service provider JLL predicts that 30 per cent of office space will be flexible in some form by 2030. Others put that figure much higher. 

How can commercial landlords adapt?

The shift currently taking place in the CRE sector will pose challenges for commercial landlords and their advisers. Put simply, with more companies seeking flexible options, landlords that are unable to offer exceptional, flexible facilities risk losing their highest paying and highest quality tenants.

Landlords must embrace the flexible working revolution, realising that businesses willing to take leases on traditional office space are few and far between. 

The first step is to make the necessary adjustments to the space itself – altering the design, functionality, and services on offer within the building will be key. It will be equally important for landlords to ensure they have the necessary technology in place, making it easy for businesses to utilise the space and facilities within it. 

Tech has another key role to play: it will help the ongoing evolution of workspace. By using data to analyse how their tenants interact with a space and use the services, commercial landlords (or those operating their spaces for them) can make ongoing improvements to their offering. They can also better identify and address unused space to ensure they maximise a building’s potential. 

For some landlords, the transition will seem daunting. The option exists, of course, for them to hand their real estate over to flexible workspace operators.

However, for many landlords this will not be a viable option, either due to the size and makeup of the space they have available, or because they want to maintain greater control over the branding of their flexible workspace and how it is managed. Landlords in this situation should consider partnering with experts that can facilitate the transformation of their traditional office space into a flexible workspace.

Ultimately, it begins with the shift in mindset. After centuries of stagnation, the CRE sector is undergoing a rapid transformation.

Landlords now face the task of adapting their offerings. They must reallocate their office space in accordance with the evolving demands of businesses, and those able to offer the best experience to prospective tenants will stand out as flexible working becomes the new normal. 

Wybo Wijnbergen is the co-founder and chief executive of InfinitSpace