A recent report from the Urban Land Institute and The Instant Group suggests that while offices are still a crucial part of business operations, the sector is undergoing significant changes.
The report, based on a global survey of 285 office occupiers, landlords, and third-party advisors, highlights the challenges faced by occupiers as they adapt to new activity-based workplace (ABW) strategies and hybrid working patterns. The study also reveals that only 14% of occupiers feel that their current office portfolios align with their business objectives and strategies.
In response to these changes, demand for flexible office space has increased by 29% globally since the pandemic, according to research by The Instant Group. The study shows that both occupiers and landlords expect greater flexibility and agility in lease arrangements over the next five years, with a focus on new lease structures that allow occupiers to grow and shrink their office footprint within a single contract. This shift towards flexibility calls for a new approach to real estate valuations that acknowledges the value of additional services and amenities, building partnerships between landlords and occupiers, and a strong brand and reputation.
The report also highlights the importance of energy efficiency for landlords, as occupiers increasingly focus on reducing overall occupancy costs. The study suggests that improving energy efficiency is crucial for retaining tenants and preserving rental income, and that tech features such as occupancy and energy monitoring will become essential for achieving net-zero targets.
Lisette van Doorn, Urban Land Institute Europe CEO, said “Our study shows that despite the state of flux that the office market is in, physical workplaces remain key for businesses to attract and retain talent, convey corporate culture and enhance employee productivity. However, occupiers have not yet fully worked out how much space they would need and which types of spaces. As a result, they need a flexible approach from landlords partnering with them on this journey.
“At the same time, landlords are trying to work out the future in this perfect storm of structural demand changes with demand generally shifting to more flexible and energy efficient spaces with access to amenities and services, while dealing with a lot of cyclical challenges, including increasing interest rates, high inflation and construction costs, limited availability of equity and debt, and higher capex requirements. With tenants critically reviewing their needs and the building attributes at lease expiry, landlords may not have the luxury for the market to improve but might need to act quite soon to preserve rental income.”
Craig Hughes, CEO of Partnerships at The Instant Group, added, “It is clear that there is a real opportunity for asset owners to deliver fundamental change in the office market. The research shows that landlords will significantly benefit from discovering how to meet occupiers’ rapidly evolving demands for sustainable, flexible and amenity rich spaces. By better aligning to occupier expectations and incorporating flexible workspace products and services into portfolios, we estimate owners can realise a potential 30% uplift of net operating income whilst also building stronger customer relationships. We are at a critical junction for flexible workspace, with demand far outstripping supply. Landlords that act quickly to integrate flexibility in an under supplied market and put sustainability at the core of their assets will be best positioned to capitalise on the market opportunity.”