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Real Estate: Be ready for the office of the future

01 July, 2021

A rethink in how we live and work is the potential catalyst for more radical changes in how we use office space. Property owners and investors have already been hit by rent arrears, particularly in the retail and hospitality sector.

Now they need to consider the impact of fundamental changes in the office sector. With lockdown easing, businesses appear confident about their ability to bounce back. Two-thirds of the companies taking part in PwC’s latest Act Now to Recover survey believe that top line revenue will return to pre-COVID-19 (FY 2019) levels within two years. A further 20% report that business is performing at the same level (15%) or even better (5%).

But even once performance recovers, there will be lasting changes around what that looks like. The competition between bricks and clicks has accelerated once again and many other businesses are now considering their approach to hybrid remote and office working. A recent survey from PwC of 250 companies revealed that 85% are looking to move to a hybrid model in some form. And finally, conversations around environmental, social and governance (ESG) commitments are growing in volume as people look for a fairer and more sustainable economy as we emerge from COVID-19.

This creates an interconnected web of threats and opportunities - in particular for real estate investors and landlords. For example, 52% of respondents to our Act Now survey had challenges meeting rent demands in the past year, with 47% anticipating difficulties in the next 12 months.

The need for a clear strategy for what comes next is heightened by the new realities emerging from the crisis.

Game-changer: Rethinking real estate

The idea of a fixed place of work is giving way to the mobility, fluidity and flexibility of hybrid working. The shift is spurring a review of how much space businesses actually need, where this should be located and how to use it in the most productive way. Our recent PwC Future of the Office Survey flagged that 50% of respondents will reduce the size of their office portfolio - and 77% are planning to reconfigure office space as a result of the pandemic. Our results indicate that office space equivalent to 14 of London’s iconic ‘Walkie Talkie’ skyscraper could be released from existing occupiers if intentions around hybrid working hold true.

With occupiers and tenants reassessing what they want from their office model - whether a collaboration space to a hub and spoke model that takes advantage of regional centres - there will be a need for property investors and owners to fundamentally reassess what this means for their businesses. For those who have traditionally been more passive investors, and relying on light touch asset management, there is now an urgent need to consider how to address these changing needs. It might mean looking to deal with more flexible leases or break clauses, or maybe looking to repurpose the office environment to a more flexible space. There’s also the need to assess the quality of your assets - with businesses wanting less office space, quality assets will be at a premium and the increasing importance of ESG will come to the fore.

For property businesses, it’s important to adapt to changing demands as part of the growing move to real estate as a service. If some large tenants reduce their office demands, there will also be more space available for organisations that may not have been able to maintain a Central Business District (CBD) base before. These include many of the small and start-up businesses that can do so much to reinvigorate trade and vibrancy within the CBD.

Game-changer: Embracing sustainability and social inclusion

With buildings and transport currently accounting for more than half of all UK carbon emissions, the move to ‘net zero’ cuts across all these developments in planning policy, business strategy and investment. PwC’s recent paper on infrastructure investment in Net Zero estimates £40bn a year over the next decade will be needed to deliver on the UK’s legal commitment to Net Zero.

Existing assets may need to be substantially replaced, retrofitted or repositioned, from electrical charging points in motorway service stations to the ways in which office developments are built and managed.

For property companies, high specifications on environmental ratings are increasingly crucial in attracting and retaining tenants. Landlords will need to make sure they have the ability to remain legally compliant with increasingly rigorous regulations as they continue to evolve. And while sustainability is critical, it’s also important to look at societal priorities as part of development and regeneration plans.

The way forward

There is a need for landlords to look ahead and plan now. Despite the pain caused by the rent moriatum, ongoing leases have provided a cushion which will come to an end as occupiers take advantage of the opportunity to rethink, reconfigure or reduce their physical office footprint. To mitigate the worst of the painful crunch points, they need to identify where the stress will fall and take action to avoid loan covenant issues due to a drop in the level of income coming in.

And Real Estate investors can no longer just buy an asset and sit on it. They’ll need capability to reposition and redevelop to maximise your asset should leases be surrendered.

We believe that there are three key building blocks around which businesses, planners, property companies and investors can individually and collaboratively rethink the future and reconfigure their operations, ways of working and use of space.

1. Think differently

For occupying businesses, the key priority is understanding changing stakeholder demands. These insights can help to challenge assumptions about what space they need to deliver for customers, where it needs to be located and how physical and digital operations can be more productively integrated. This should form the basis for a wider strategic review, taking into consideration other opportunities to improve cost efficiencies.

For property companies, the key priorities include gauging changing tenant demands and quickly repositioning or repurposing assets in response. Getting closer to tenants and developing service capabilities can help to boost occupation, while improving operational resilience and flexibility. There is also a need to consider partnering around your use of assets - especially opportunities to develop capabilities in collaboration with shared service companies and the impact a more flexible revenue model will have on valuations.

2. Think relationships

Understanding the connections between societal demand, the built environment and infrastructure will maximise and unlock value.

Investors and landlords should make the most of the opportunity to retain and attract business tenants for their portfolios by anticipating their needs. For example, if businesses are rethinking use of space as a way to accelerate digital transformation.

For planners, working with businesses as they rethink their space needs could help to boost sustainability, social inclusion and the accessibility of workspaces and surrounding infrastructure. In turn, Landlords and tenants can work together to operationalise ESG and deliver mutual goals.

3. Think better

With ESG performance now as closely scrutinised as financial return, it’s important to put sustainability and social inclusion at the forefront of strategy. With a flight to quality assets, property investors should look at the performance of their real assets.

Priorities include auditing the social and environmental impact of real estate usage. It’s also important to recognise sustainability and social inclusion as opportunities to strengthen engagement with employees, customers and other key stakeholders

The space to succeed

As we move out of lockdown and embrace new possibilities, the changes in how we use real estate and infrastructure should be at the centre of the strategic rethink. The organisations out in front are not only looking at how to meet immediate customer demands, but also how to reshape their offering and operations for the transformation in social and commercial expectations ahead. The time is now for investors and landlords to anticipate where crunch points may occur and proactively consider if they have the capabilities and capacity needed to do things differently.

If you would like to discuss any of the issues raised in this article or how they might affect your organisation, please feel free to get in touch.

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Mark Addley

Mark Addley

Real Assets Business Restructuring Services Leader, PwC United Kingdom

Tel: +44 (0)7715 211555