How Will Covid-19 Change Demand For Office Space?

COVID-19 has focused minds on exactly what the office is for and how central a role it should play in corporate strategies and budgets, as well as making the strengths and limitations of home set-ups all too apparent.

Over the last few weeks, WSP has been considering what the future holds for the buildings where so many of us used to spend so much of our waking hours. From a human point of view, we’ve already explored how we’ll feel about going back to the office and how we might behave differently when we get there. From an engineering point of view, we’ve looked at whether we can virus-proof the office and improve resilience in this and future pandemics. Both of these have implications for how much space organizations might need or want in future, how much that space costs to fit out and operate, and ultimately how much occupiers can, or choose to, afford.

This article is about those decisions: how is demand for office space likely to change as a result of COVID-19?

To the surprise of many, COVID-19 has indeed demonstrated that a considerable amount of the work that usually takes place in offices can carry on when they are closed. Some have discovered that they can be more productive at home, and enjoy the freedom of a more relaxed schedule. Few openly mourn their morning commute.

But if COVID-19 has accelerated the trend for home working, it has also revealed its limitations – in a knowledge economy, an organization’s success will still depend on face-to-face interaction, collaboration and serendipity. With universal flexible working, the office could become a vital anchor. “When you’re trying to attract, retain and nurture top talent, the workplace plays a really significant part in how people perceive a business,” says Michael Holloway, general manager of property investment at Kiwi Property, one of New Zealand’s largest real estate firms. “Rather than doing a job interview on a videoconference, you want to go into their space and see how they value other members of staff.”

The office has an arguably even more important role in providing learning opportunities for younger employees, says Jim Coleman, head of economics at WSP in London. “A lot of developing people is not formal training, it’s all the other interactions. There’s still a lot to be gained from being together as a team.” This will apply differently across demographics – with a tension between younger employees’ need for training and senior employees’ greater motivation to work from home. “For people at the start of their careers, there’s probably more desire to be with other people because you’re still learning and you want the experience and the social life that goes with it. Whereas as you get older and you may have settled down and have children, it’s much easier to work from home.”

A greater amount of home working will persist: for the sake of resilience as much as anything else. “The next time a coronavirus comes along, we know we need to move quickly to this model, which means that it has to be in play – at least in part – most of the time,” says Coleman. “I don’t think any business will want to go back to the way things were done, so that has an immediate implication for space.”

Changing working practices are not the only determining factor. The International Monetary Fund has described the “Great Lockdown” as the worst economic downturn since the Great Depression of the 1930s, and foresees a recession at least as bad or worse than the 2007-08 global financial crisis.

Inevitably there will be a reduction in occupier demand, though it will vary from sector to sector. The worst-affected tourism and leisure industries will need less corporate space, while some professional services firms may be able to continue as normal with altered working practices. Booming sectors like technology and e-commerce are already more likely to embrace virtual working – Twitter CEO Jack Dorsey has said that employees can work from home permanently if they want to. “Companies could see this as an opportunity to downsize, to reduce operating costs and invest more in technology,” says Paul Stapley, vice president in the project management team at WSP in Canada. “Occupiers have already been moving to shorter lease terms. If they’ve only got, say, six months left, they may decide to walk away.”

Organizations had already started to shrink footprints so that they had less than one desk per person, and the recession is likely to accelerate that trend. “In a crisis, there is always a focus on trying to reduce fixed costs like offices,” says Magnus Meyer, Managing Director WSP Nordics & Continental Europe. “The typical tenant will start thinking that maybe they don’t need space for 100% of their employees, maybe only 75% or 60%. Or they might not expand because of the crisis, but just work with the space they have.”

What makes COVID-19 such a strange phenomenon is that its immediate impact will be to push organizations in the opposite direction – they will need more space per employee. Companies have been squeezing more and more people onto floorplates for a long time, with just 8m² per employee becoming a typical density. For offices to reopen safely and maintain physical distancing, ratios will have to shoot up again, with shifts, staggered start times and continued remote working essential.

It’s too early to say whether we will ever again feel comfortable occupying space in such close proximity to others, which makes the longer-term impact on office requirements very hard to gauge. Perhaps the better question is whether organizations will want the same kind of space that they’ve occupied in the past.

Companies will now be well aware that they could make do with less office space. But they may also have realized that they also need better, more resilient office space. “This crisis is probably going to accelerate the need for modern, flexible office space with lots of services,” says Meyer. “The buildings that suffer will be the older ones that tenants just don’t want any more. They’re just the wrong product.” 

Landlords will have to differentiate themselves with added services: “You might call it ‘high-end’, not from a luxury perspective but from a content perspective – you won’t just lease a ‘stupid’ space, you need to fill it with services to help the tenant be more productive, whether that is sustainability or wellness solutions or digital technology.” 

To justify its existence, the office will have to become a destination with a purpose, says David Gooderham, global account director with WSP in London. “If people continue to be the driver for change, as the most important component of an organization’s profitability, businesses will have to provide safe working environments that increase the feelgood factor and ultimately raise productivity and creativity. There’s much that we can learn from this lockdown period to make the workplace better and our interactions with it more effective.”

Holloway thinks the “hotelization” of office space will continue, with workplaces importing some of the home comforts that we’ve become used to. This might mean more relaxed dress codes, but also real planting and soft furnishings, to make spaces more cosy while helping to subtly create distance between people. “We need to think about furniture and other design solutions to create separation without losing the benefits of collaboration. If offices have a future, people need to feel safe in them.” 

Coworking spaces have been leaders in the field of hotelization, and are perhaps the ultimate destination offices. But COVID-19 has left tumbleweed blowing through these buzzy, high-density communities. We’ve considered whether this will be the death of the coworking space in a separate article.

This is another area where the short-term impact of COVID-19 may look very different to how things will eventually pan out. As workplaces start to reopen with physical distancing measures in place, offices in the centre of major cities are the most problematic, often necessitating commutes on crowded public transit. Suburban or out-of-town locations where workers typically drive will be able to resume something approaching normal operations much more quickly.

But if offices become destinations to meet coworkers, get inspiration and exchange ideas, rather than just to sit at a desk, those in buzzy locations make more sense. If organizations don’t need as much space because people work remotely more often, they may choose not to cut their rent bill but to spend the same amount on a smaller, more characterful building in an amenity-rich central location – a much more attractive destination for employees than a featureless office park.

A shift to working fewer days in the office will benefit expensive central locations most, believes Tommy Craig, senior managing director at Hines in New York. “New York is a very challenging place to achieve good work-life balance because it’s extraordinarily expensive to live and raise a family. If you alter that paradigm and allow employees to work from home one or two days a week, the whole work-life balance shifts in the direction of something much more favourable. Commuting 40% less is a big deal, given how large New York is and the length of our commutes.”

Economic activity has strongly clustered in the US’ larger cities over the last 50 years, as employment has shifted from manufacturing to services. Professor Bill Kerr at Harvard Business School has studied the progress of its world-beating talent clusters such as Silicon Valley, which exert a powerful, self-perpetuating global pull for skills and capital. Will they continue to thrive in the post-pandemic world? “What made talent clusters so powerful is that ideas can jump from person to person – of course if germs and viruses are also jumping from person to person, that’s going to make them a lot less attractive,” he says. “This has always been a big challenge for places that were built around interaction and being in close proximity.” If we can get back to work within the next few months, he thinks talent clusters will be secure for some time to come. “But if the pandemic continues for several years, these cities are going to struggle and we may see a more systematic pullback from the clusters. It’s a question of how it plays out over the next year.”

Another impact of COVID-19 could be that companies split operations between several locations, potentially benefiting smaller centres. “A lot ofcompanies are going to be thinking about how they could make their workforce if not pandemic-proof, at least pandemic-resistant,” says Kerr. “Opening a second office might not have made sense historically, but may be something that younger companies should do at an earlier stage. We have celebrated density and packing people together, but that’s putting a lot of eggs in one basket.”

This will be down to the dynamics of supply and demand in local markets. In some places, there was already a structural undersupply of modern, high-quality office space, and COVID-19 is likely to exacerbate this, even if the overall demand remains the same. Changes may also take a while to feed through. As CBRE Canada has pointed out, commercial real estate is a lagging industry – two years elapsed before office vacancy rates peaked following the global financial crisis.

The other side of the equation is the supply of capital for office projects. WSP director Gary McCarthy advises financial institutions, and he thinks real estate will still be attractive. “There is a deep pool of capital available for the right assets and real estate will continue to offer long-term investment managers a defensive strategy for their portfolio, and return yields sufficiently above government bonds. There will be specific challenges – regional offices will struggle more than prime city centre offices – but I don’t see there being a drop in capital commitment.”

The big question for investors in the commercial sector, McCarthy adds, will be how to differentiate your asset from the rest. How can you make sure that your office is the one that tenants and their employees want to go to. What will make an office into a compelling destination in a post-COVID world? That’s a question we’ll consider in the next article in the series.