The Covid-19 pandemic has impacted all our societies, economies and lives heavily since its outbreak earlier this year. Obviously, there are differences in geographies, but trends are similar everywhere as you would expect from a worldwide pandemic. Its impact on real estate has also been immense, but there are huge differences between asset classes. Hotels and retail have been hit hardest, logistics and residential seem to be the winners and offices are somewhere in the middle.
Acceleration of existing trends
In many cases Covid-19 has only accelerated trends that have existed before, probably with the only exceptions being hotels and residential. Retail has been losing market shares to e-commerce, logistics has been the clear winner of a booming e-commerce market and home office had already been increasing before - about 10-20 per cent of companies worldwide had allowed their employees to work from home in 2019. However, Covid-19 has fast-forwarded these pre-existing trends. E-Commerce’s share of the entire retail market in the US, for example, grew from 16 per cent to 21 per cent this spring. And these trends will certainly not go away once a vaccine will have been found.
When many companies worldwide decided this spring to close their offices for weeks or months and asked their employees to work from home, everybody was surprised how well things worked and how easily technology was able to cope with such dramatic and rapid change. After a few weeks the new big topic in the media became the question if offices were still needed and what would happen to all the empty office towers that seemed to be on the horizon. So do we really still need offices at all?
Do we still need offices?
Imagine a young graduate from a top university receiving two job offers. One company says she can work from home for at least the first two years and the other company offers great modern office space with all the latest amenities where cool colleagues and interesting superiors meet on an almost daily basis. Which job offer do you think she will accept? Or imagine a 40-year-old man in middle management. His boss calls him to his office and tells him he has great news for him: from Monday on he can work from home for the rest of his career! How do you think he will feel? Will he regard this a great career opportunity or will he rather begin to worry about his future and this potentially being a first step towards redundancy?
Many forget that one of the main reasons why home office worked so well this year is that everybody knew each other well, had made friends and knew who was not a friend, knew where to go to ask for help and support when needed, bosses knew who to rely on for specific types of jobs etc. Imagine this had not been the case, how would such home office workers feel all alone at home for months or years and how would their superiors organise work for staff they had barely ever met?
The new office will look differently
Most seem to agree that we still will need offices; the question is for how many of our staff, for which tasks and for how many days per month? It all will depend on the businesses we are in and the specific jobs we are doing, but home office for one or two days per week could certainly become the new norm. So we will still go to the office, but we will do different things there. We will not go there to type all day or research something on the internet all day on our own. We will go there for meetings, group work, creative tasks and just to mingle with co-workers and thus enhancing unplanned creativity. Therefore the new office will look differently, it will have less old fashioned work stations, it will have more areas to meet, to be creative, to drink and eat, desk sharing will increasingly become the norm etc. We also might not only have one big HQ in the city centre, we might have satellite offices on the fringes of cities allowing our staff to use them for certain types of activities without having to commute all the way to the city centre.
Also office buildings will look differently: touchless access control, systems to find staff within the building, quality of air and openable windows are just a few examples that future occupiers will be more interested in than before.
Covid-19 has taken its toll on office demand
Co-working (Regus, Spaces, Wework etc.) has been particularly impacted this year by Covid-19. Vacancy of most providers has increased rapidly; in particular large companies had used them for short term or creative projects and have cancelled them or moved them back to HQ or into home office. In Paris, for example, office demand from co-working providers accounted for 30 per cent of all office demand in 2019. In 2020, so far, their share of office demand was 0 per cent! Even so, for the occupiers the concept of flexibility has worked well and therefore has proven the viability of this new way of renting office space.
Not surprisingly, Covid-19 has taken its toll on office demand during H1 2020. Overall, demand in Europe decreased by 35 per cent compared to the same period last year, but there were big differences between cities: Bratislava (- 6 per cent) Baltics (- 13 per cent) and Warsaw (- 16 per cent) saw the lowest decline in demand and on the other end of the spectrum were Vienna (- 47 per cent), Budapest (- 49 per cent) and Bucharest (- 60). Rents and vacancy rates were surprisingly stable in most cities during this period, probably because vacancy rates are relatively low (they are still well below the five year average) and development pipelines in most cities was low too. It is difficult to explain the differences between individual cities and also whether specific or non-Covid-19-related issues will have had their impact: for example, Vienna this year has an extremely low pipeline of new office completions which normally stems from lower demand.
Back to Europe
Office development pipelines were hardly impacted by Covid-19 this year, however it has reduced pipelines for 2021 and onwards. Bucharest and Prague forecasts saw the most significant cut-backs, but Bucharest is still expecting a considerable rise in office completion in 2021 compared to this year.
There was also a long term positive impact on office markets in CEE: companies who had outsourced to India for example were facing severe problems as home working in India is not as easy as in Europe, beginning with electricity supply and internet connections at the homes of office staff. As a consequence we are beginning to see increasing demand from companies who are planning to near-shore from Asia back to Europe.
Investor demand for offices is more or less the same compared to pre Covid-19. On the other hand demand for hotel and retail has decreased substantially. But yields have moved in different ways: in Austria and Germany office yields have further decreased whereas in CEE office yields have gone up slightly, probably explainable by the search for safe havens by institutional investors.