The Post-COVID Future of Corporate Real Estate Portfolios & Workplace Utilization
Sep 29 2020
Pre-COVID, it was commonly known that there was a vast amount of corporate real estate underutilized. VergeSense’s own analysis of 10 million square feet of office space found that the average utilization rate for an office was just 27% in 2019 -- a drop of 13% from the year previous.
But with the current crisis causing companies and their employees to rethink their movement in the workplace, it’s clear that companies will need to reimagine how they manage their real estate portfolios. This includes collating the enormous costs of owning such portfolios against new workforce patterns and preferences. Short term this underutilization of current space necessitates a flex workplace; longer-term it will likely result in the redesign of an entirely new office that accommodates for our new normal.
This week, in the third and final installment of our Rebirth of the Office Blog Series, we will dive into the post-COVID future of corporate real estate portfolios and office utilization and explore what it means for the consolidation, re-allocation, and redevelopment of the workplace portfolio. With the workplace’s value now lying in its ability to facilitate safe collaboration between workers, it’s evident that both immediate and long-term changes are necessary to facilitate the new needs of all employees. Here are 4 ways we see corporate real estate portfolios changing as a result of COVID-19.
1. De-densification & Flexible Space for Near-Term Risk Mitigation
Currently hovering around 194 SQFT, the average space per employee in the office has incessantly declined over the past decade. However, this doesn’t necessarily mean that employees are finding less space for themselves. In fact, the increased use of workplace sensors in recent years has captured how the rise in remote and activity-based working has actually expanded office space per worker. It’s therefore more likely that this pre-allocated 194 SQFT is closer to 750 SQFT per employee on any given day.
As COVID-19 continues to heighten workers’ expectations for things like cleanliness, sanitization, and appropriate social distancing in the office, executives will be looking to take advantage of all this available space as part of their risk mitigation strategies. Among the many components of these strategies is the option to flex the use of the workplace with a rotating cast of well-spaced workers. As discussed in part 1 of this series, a rotating workforce is something we expect to stick in most offices as many employees choose to remain remote at least part-time after the pandemic subsides. And it turns out giving employees the option to do this not only builds a better job experience but creates a healthier and optimized work environment for all.
2. Consolidation, (Re)allocation and (Re)Development of Workplace Portfolios
Corporate real estate costs account for between 9% and 12% of a company’s total cost base, with the majority directly correlated with footprint. But with de-densification on many companies’ radars, there is potential to reduce this benchmark by about half overtime. But how so?
Firstly, corporate real estate leaders will be looking to rebalance their portfolio of space solutions with owned space, standard leases, flexible leases, flex space, co-working space, and remote work. We already touched on the rise in popularity of flexible spaces, which now account for about 3% of the US market and have been growing by about 25% annually over the last 5 years, in part 1. But perhaps another component companies will need to consider is consolidation within one HQ or having many smaller satellite offices.
According to McKinsey research, office-space decision-makers expect the percentage of time worked within main and satellite offices to decline by 12% and 9% respectively post-COVID, while flex space will hold approximately constant, and work-from-home settings will increase to 27% of work time from 20%. As companies consider the new needs of their employees as well as how to maximize their return on investment, it’s possible that, at least in the near-term, they will take a hub-and-satellite approach that reduces health concerns by diversifying a firm’s employee base across a broader geographical area.
3. Urban Vs. Suburban Offices
With the biggest coronavirus outbreaks occurring in dense urban areas like New York and Seattle, as well as the relative inefficiency, risk, and cost of public transportation today, it’s likely that we’ll see downtown office markets soften and suburban offices and campuses resurge. While it’s true that suburban office space fell out of favor for many years as companies sought to attract young talent who were drawn to the excitement of the city, it’s easy to see why the COVID-19 pandemic could shift this on its head.
For one, such a move could mean considerable rental savings for companies and more square footage to leverage for flex working. Secondly, what was once a land grab for downtown real estate could pivot to be a rush to the suburbs, where space is plentiful and social distancing is much easier to enforce. And thirdly, suburban markets have suddenly become a much more attractive option for young workers who’ve been isolating in cramped downtown condos for months. According to the International Council of Shopping Centres, 27% of adults in the U.S. are considering moving homes because of the COVID-19 crisis, 43% of which are millennials looking to flock to the suburbs and rural towns.
As a result, investors today are questioning whether office space will go the way of retail in the next five years. But what must be noted, is that should this come to fruition, we can expect workers to be highly selective of their suburban offices, opting for only high-quality buildings with sprawling amenities.
4. Development of Peak Performance Workspaces
With the office now catering to face-to-face meetings that promote connections and collaboration, companies will need to refocus and redevelop spaces into a high-performance workplaces. Like sporting venues for athletes, everything within these spaces will need to be redesigned for optimized interactions, easy collaboration, and ultimately, team health, wellbeing, and productivity. In light of this, and given their popularity pre-COVID, there will be more of a focus on collaboration rooms that promote creativity and motivation where these types of workspaces account for up to 80% of the office.
And as discussed in a Q&A with John Macomber of Harvard Business School, healthy buildings and environmental conditions will play a substantial role in creating these high-performance workplaces. This will drive the need to capture environmental data to use alongside utilization and occupancy data. As Gartner states, a high-performance workplace is unachievable without continual investment in the people, the processes, the physical environment, and technology. It’s only through these means that workplace leaders can measurably enhance the ability of workers to learn, innovate, lead, and ultimately, achieve efficiency and financial benefit.
How companies and their employees drive collaboration and productivity has drastically changed since COVID-19. And as they prepare to return to the office at least part-time, there are undeniably valuable lessons to be learned on what makes the office worth heading back to. At VergeSense, we’re excited to continue helping our clients optimize their workspaces to fit the needs and demands of workers, and also keep their employees productive and safe.
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