Remote working is set to survive the pandemic--at least in a hybrid format splitting time between the office and home--but its effects on office property are less clear.
It is too simple a calculation that demand for office space will drop by 15-20% because people work one or two days from home, says Langellier. Offices are rarely 100% occupied, he says. Pre-pandemic data shows that occupancy averaged around 80% because of leave, illness, business travel, external meetings or other reasons.
Offices will still be needed. A survey by Gensler shows that a hybrid model is preferred by more than half of employees. But 90% want a dedicated desk or assigned office when they are at work.
Employers, too, want people to return although the signals are mixed on allowing some flexibility to attract and retain talented staff versus remote working compromising company culture and productivity.
Added to that, remote working has become a political debate around questions of taxation, shared costs, and who decides when to work from where.
Langellier expects demand to shift towards the most flexible spaces, “tenants showing a certain foresight in their office rental strategy in order to take into account potential growth, but also rapid and brutal decline of activity and staff.”
While hot desking or shared offices could diminish the need for space, there are also reasons to expect companies to need more room, says Langellier.
“After several decades of compressing workspace per employee to save money and increase productivity, the need to respect social distancing rules and the need for employers to make offices more attractive could trigger a U-turn,” he says of the trend to de-densify.
“From the current five square meters per employee, could we go back to 15 square meters? Will we see the return of individual offices and larger and more numerous collaborative spaces? Such trends could once again increase the amount of office space needed” the analyst says.
In both cases, “it is the high-end offices located in highly desirable areas--especially those with high standards of sustainability, well-being and technology--that will remain the most attractive.” In contrast, “less prestigious offices located in less attractive neighborhoods risk being penalised by weak rental demand and lower rents or even reallocations.”
Similarly, “secondary offices, older and unfit for their intended use, are at risk of seeing their attractiveness, rents and valuations deteriorate, and potentially be subject to reallocations,” says Langellier.
For now, the rental market is in a status quo phase. Uncertainties related to the end of the pandemic, virus variants and possible new lockdowns urge tenants to be cautious, biding their time until they have more visibility before making decisions that will have long-term impacts. The trend is towards almost automatic renewal of leases.
But over time, the overall supply of office space will increase--many developments coming to market were launched years before the pandemic--while demand, at best, will stagnate. “A drop in rents is likely, but it will only affect lower quality properties,” Langellier says.
Geographically, the markets that will fare the best are those with relatively low vacancy rates at the start of the pandemic--this is the case in Luxembourg. They will therefore be better prepared for this new environment, believes Guillaume Langellier, for whom the office asset class retains solid prospects.
And if teleworking were to really disrupt demand in various local office markets, he remains convinced that high-quality modern surfaces, located in sought-after and well-served downtown areas, will continue to benefit from high occupancy rates and investor interest.
This story was first published in French on Paperjam. It has been translated and edited for Delano.