Many people will continue to work partly from home until after the pandemic is over. This reduces demand for office space. At the same time, however, the function of offices is changing. This means office space will continue to be in demand, and mainly at prime locations, says Richard Gwilliam, head of property research at M&G Real Estate.
Gwilliam still finds it difficult to say how the ‘new normal’ will exactly look like, but that people will work from home more regularly is a certainty for him. ‘Office life will look different. It’s normal now to work from home. As this has been long period now it’s become entrenched in people’s lives. So in aggregate there will be less demand for office space. In the pre-pandemic era it was already normal to not go to the office for some days in countries like the UK and the Netherlands. In 2019 for example, 37% of Dutch people were sometimes working from home according to Eurostat. Working from used to be semi-normal already, and now it has become totally normal.’
Gwilliam cites M&G’s new head office, which it moved to in late 2018, as an example. ‘When we moved in, no-one was assigned a desk and there are only 0.8 or 0.9 desks per workers. This will continue as the desk rate per person will reduce further. But this is not to say overall floor space will be reduced.’
Meeting space
This is because the office is changing from a place to work to a place to meet. ‘We can’t do [physical] meetings or client interaction at home. In the post-pandemic era the rationale of people will not be the same: much more of floor space will be given to meeting spaces. The office will be more about facilitating interaction.’
But companies will give up smaller office locations and increasingly concentrate in hubs, according to Gwilliam. ‘Instead they will rent flexible co-working spaces in a number of locations, according to the hub and spoke model. We are already seeing more and more of this happening. What’s more, co-working spaces are often located in central, sought-after locations and in modern buildings with good facilities.’
On the other hand, outdated, out-of-town offices will be increasingly difficult to rent out, Gwilliam believes. ‘This goes for offices on, for example, industrial estates where call centres are often located. That kind of work you can easily do from home too.›
Owners of these kinds of offices run the risk of ending up with a stranded asset that they can’t anymore sell for an acceptable price, Gilliam warns. ‘If the sustainability requirements for offices become stricter in the coming years, property owners will be faced with the choice of either investing a lot of money in a renovation or to write off these offices.’
Gwilliam therefore advises property investors to focus even more on modern offices in popular locations than before the pandemic. ‘These assets have suffered little from the crisis so far. People prefer to meet in well-equipped, modern offices in central locations. If we look at recent deals in, for example, Amsterdam’s business district, we can see that risk premiums have barely risen. Yields averaged 3.25% before the crisis. Now it’s perhaps 3.4%.’
Fewer deals
However, the number of new deals that are being concluded has fallen drastically. Real estate researcher CBRE expects office deals this year to be €1.5 billion less than in 2019, a decrease of 25%. ‘But that is normal in a crisis. The uncertainty that comes with it simply leads to investors being more cautious,› says Gwilliam. Yet the gap between asking prices and what investors are willing to pay is often very large. ‘It is difficult for owners to accept a much lower price, but especially for low quality offices it is inevitable that valuations will eventually go down.›