What will emerge from the conflagration is still anyone’s guess, but experts converge around a few basic certainties. In a recent piece, the New York Times pithily summarised the most fundamental conclusion, opening the article with the reassuring assertion that “coronavirus won’t kill the office.”
“If anything,” the 21 January story proclaimed, “it figures to be more dynamic than ever.”
Since the start of the pandemic, around a year ago, a plethora of surveys of both employers and employees have sought to pinpoint the precise ways this new dynamism will play out. These surveys overwhelmingly support the Times’ thesis, suggesting that both bosses and workers are eager to get back to the office—just perhaps not in precisely the same way as before the pandemic. Most surveys suggest that a much-feared drop in employee productivity has not, in fact, come to pass, thus ushering in the possibility that many offices will allow for at least some remote work even after the pandemic is finally behind us.
A poll by the consultancy PWC found that more than half of workers surveyed (52 percent, to be precise,) thought their productivity had improved over the prolonged work-from-home period. And even studies that point to a modest decline in productivity, such as ones conducted in Japan and China, blame the dip on the presence of small kids in homes-turned-workplaces—a factor that presumably won’t be as much of an issue once schools reopen. An OECD report synthesizing a wealth of data on employee satisfaction with teleworking suggests there’s a sweet spot that tends to fall at around the halfway mark, meaning that a 50-50 split between office work and telework tends to make for the highest simultaneous employee productivity and satisfaction.
This, too, suggests that offices will continue to be de rigeur for most firms, although flexibility will be top of mind when seeking out new office spaces and securing leases going forward. A study by real estate behemoth JLL suggested that leases have gotten moderately shorter amid the pandemic.
“Corporations want the ability to react to a host of unknowns brought on by the coronavirus and economic pressures, so they’ll continue to pursue office space options that provide them with enhanced flexibility for the foreseeable future,” the report quotes Ben Munn, JLL’s Global Flex Space Lead, as saying. “A mix of traditional and flexible space is becoming even more important to office occupiers looking to make the most of their commercial real estate portfolios…. Having said that, we still expect companies to base site and occupancy decisions on productivity, innovation, collaboration, workforce recruitment and retention, as well as other financial and strategic objectives.”
In addition to increased flexibility in the terms of leases on office spaces, the pandemic has sparked a wholesale reassessment of office layouts, too. The open floorplan, which had become all but omnipresent in recent years, appears to be on its way out. (This is, incidentally, not the first time in which a health crisis has sparked a revolution in office layouts. The tuberculosis epidemic of the early 20th Century helped trigger a shift toward the Modernist office, with its cubicles inspired by sanitoriums.) Cubicles, with their profusion of virus-impeding walls, look to be making a major comeback, as are amenities and materials aimed at making office spaces healthier, such as easy-to-clean floors, high-end air filters and windows that open to promote air circulation.
“The trend over the last three decades was to lower the (office) square footage per person,” Tomasz Piskorski, the Edward G. Gordon Professor of Real Estate at Columbia Business School, said on a recent webinar. He said that in 1970, the average worker occupied 600 square feet (around 55 square meters), while by 2015, that square footage had dwindled to around 150 (or 14 square meters) but stressed that the pandemic stood to reverse the trend. “If you want to keep people in office spaces, you may have to socially distance them better—some regulations might require you to do that—so you might end up needing more office space per worker…and some prime office spaces might benefit from that.”
With the pandemic having accelerated changes in the commercial real estate market that were already playing out well ahead of COVID-19, experts agree that the key to a productive portfolio going forward is diversity—a mix of office properties, industrial and storage spaces, in addition to residential properties. The current uncertainty in the commercial real estate market makes it an ideal moment for bold investors to capitalize on all the benefits that commercial properties offer, including consistent long-term yields and secure assets during both high and low cycles. Another advantage of investing in commercial real estate is that it can offset the impact of inflation over time, as investors are able to increase their rental prices to reflect the inflation rate. Plus, it’s often possible to benefit from capital appreciation when selling assets in the future.
Take, for example, Portugal, where commercial yields can often outperform residential yields at around 4-7 percent. In 2019, the total sum invested in offices in the Portuguese capital, Lisbon, reached €982 million—which was more than double the total a year earlier. And the first quarter of 2020, ahead of the pandemic, saw 44,000 square meters of office space in the city occupied, which is 5.2 percent higher than in the first quarter of 2019. To read more about the Portuguese commercial market, click here.
All told, the pandemic-induced uncertainty in the commercial real estate sector is a golden opportunity for those with the foresight to seize the moment.
“If you look at the commercial mortgage-backed securities market… you see there was a big increase in delinquency rates following the pandemic,” said Prof. Piskorski of the Columbia Business School. “Of course, these delinquencies are a benefit for some folks…. You have companies… that recently raised significant funds to invest in buying distressed mortgages and distressed properties, viewing it as a once in a lifetime opportunity to buy distressed assets.”