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Office Politics – Changes in Office Use in a Post-Covid World: by Kevin Sharkey

I have recently read two interesting commercial property reports that both provide insight into the future direction of the UK office market. 

Firstly, the paper by Cushman & Wakefield in partnership with the Centre for Real Estate and Urban Analysis, titled ‘Purpose of Place: History and Future of the Office’

The paper examines the role of the office and identifies five key dynamics that will drive the future of office use: Productivity/Output; Innovation/Creativity; Company Culture; Employee Satisfaction and Location/Building Strategy. 

The report dives into the histories and economic developments that led to the rise of the office throughout the industrial and experience economies. It concludes that organisations use offices due to: managerial command and control, optimization of productivity, capital requirements and social interaction. All of these drivers occur inside the broader context of ‘cities’. 

Now, in a post-Covid world, each of these dynamics is threatened by increased remote working and more distributed workforces.

Each of the five key dynamics are then reviewed as to how remote working and distributed workforce affects them, with the conclusions as follows:

Productivity/Output:

  • Distributed workforces offer potential output benefits to employers including disruption avoidance, increased productivity, and improvements in work life balance.
  • Productivity is difficult to define for knowledge and creative class workers.
  • Impacts of remote work vary greatly based on individual employees.
  • Employee choice is net-positive, working remotely every day is not.

Innovation/Creativity:

  • Getting away from the office has measurable benefits for staff but these gains have not been proven over long-term permanent virtual work.
  • Impromptu collaboration plays a key role in innovation and creativity.
  • Remote work is complementary to in-office work but not a full substitute for it.
  • The positive impacts of remote working can only be fully realised if employees have freedom to determine their own engagement within it.

Company Culture:

  • Remote working can provide some benefits to culture but poses more challenges.
  • Less face-to-face interaction results in reduced employee engagement.
  • Up to half of employees struggle to connect to company culture while working from home.

Employee Satisfaction:

  • Future of office demand will be different based upon the autonomy and interpersonal interaction of specific groups of employees.
  • Negative effects of remote work on employee satisfaction can be made worse by poor management of remote workers. Talent management still matters.

Location:

  • Remote working and technology have mixed impact, knowledge sharing still requires office space and a physical location.
  • Video conferencing can replace some interaction, but spontaneity comes from people physically interacting at the office and around the city as well.

Based on the summary of the five main drivers, the report concludes it is unlikely organisations will see sustained 100% remote work in the long run. Productivity is sometimes enhanced through remote work but other times it declines and very much depends on the demands of the job. 

Creativity and innovation might increase for highly creative work in the short term, but it can also make creative decision-making more challenging. Corporate culture is likely to be negatively impacted by a more distributed workforce as managers have to adapt to creating shared values and experiences.

Overall, I agree with the report and can see many of its findings in the impact COVID has had on our own business, Key Land Capital. 

Getting back into the office, and having introduced a flexible working policy, has been positive overall for our staff and the company. Most of our team do not want to be home-based 100% of the time and they embrace face-to-face engagements within the office. 

As they feel trusted and empowered to manage their own time and workloads through flexible working, this has brought productivity and engagement improvements.

This leads me on to the second related report: ‘Quality over Quantity: Regional Offices 2020 Report’, by Lambert Smith Hampton. This looked at the post-Covid workplace from a physical perspective and what landlords should be doing to attract and retain office tenants. It then goes on to to review each of the UK regional office markets in 2020.

There were some key takeaways from the report that I agree will have a direct impact on the type of office product that landlords should be bringing to the market, and the requirement for more flexible, ready-fitted solutions for tenants to move straight into.

Increased competition in the market from serviced office operators requires landlords to provide a more flexible option for customers. Landlords that can provide fitted space have an opportunity to capitalise in the current market. Tenants can move quickly in a matter of days, as opposed to months. Lease terms are likely to be shorter and this combination of ‘oven ready’ office space and short leases will appeal to a larger part of the office demand pool moving forward.

Of course, this requires landlords to bear a significantly higher burden in terms of capital costs and expense but this is then offset by shorter void periods and reduced or negated rent-free periods. 

The report also suggests a rental premium over conventional unfitted space by as much as 30%. Currently there is very little choice for fitted options in the UK regional markets. This is something we are looking to capitalise on with our future commercial developments at Key Land Capital and we hope to provide just this type of fitted office space that our future tenants will need.

One of the issues I believe this raises is how lenders and, subsequently, valuers adapt to this different tenant/landlord model. 

With reduced lease terms and higher capital upfront costs for landlords, the traditional yield valuation models may not apply. As we have recently seen, many lenders may revert to a vacant possession capital value model which will result in reduced office valuations and lower ability to raise capital against occupied assets. 

We see it as important to build an operating brand that can provide additional value to the asset and be seen more as a property business as opposed to just a single property asset. 

It is for this very reason we have recently launched ‘Key Spaces’, our new division which will manage and operate all of our commercial assets going forward, differentiating these assets from the competition.

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