Office real estate is in a state of upheaval worldwide

A new study on the future of office real estate prepared by the Urban Land Institute (ULI) and The Instant Group shows that the office space segment is clearly in transition.

The research demonstrates that tenants continue to explore the impact of activity-based workplaces (ABW) and hybrid work models that require more flexibility on the part of landlords. In addition, landlords are trying to manage the cyclical challenges posed by rising interest rates, continued high inflation and high construction costs.

285 office space tenants, landlords and third-party consultants from North America, Europe, Asia Pacific, the Middle East and South America participated in the study. In addition, extensive interviews were conducted with leading industry experts and two rounds of discussions were held to explore the changing demands of tenants, the response of landlords, and the impact on their business models.

While the office plays an important role in tenants’ workplace strategies for instilling company culture, improving collaboration and mentoring new and young employees, the study shows that only 14 percent of tenants believe their current office space is fully aligned with their business goals and strategies.

According to research conducted by The Instant Group, demand for flexible office space has increased 29 percent globally since the pandemic.

In addition, the current survey shows that landlords (80 percent) more than tenants (75 percent) expect greater flexibility and adaptability in leases over the next five years. There are regional and industry-specific differences in what this flexibility should look like. However, there is widespread agreement on the development of new leasing structures that will allow tenants to increase or decrease the size of their office space as part of the agreement. “This means the tenancy must continue to evolve into a partnership between landlord and tenant,” said Craig Hughes, CEO Partnerships at The Instant Group.

The need for shorter, more flexible rental periods and usage-based (pay-per-use) services requires a rethink of the business model. 62 percent of landlords expect capital values to decline based on the current valuation model, which recognizes only long-term leases. Just as providers of office space are evolving their strategy toward a “space as a service” offering that focuses on the operational management of buildings, a reorientation in real estate valuation is also required. Assessments must take into account the value of additional services and offerings, the partnership between landlords and tenants, and a strong brand and reputation. The impact of flexibility and changing lease periods should also play a role.

It is now necessary for landlords to improve energy efficiency. Although ESG is an important feature for tenants, less than two percent of owners believe they have the necessary investment volume (capex) to respond to ESG-related requirements. While tenants focus on reducing overall rental costs, for landlords, improved energy efficiency is a prerequisite to retaining tenants and securing rental income. Technical aspects, such as consideration of usage and energy efficiency, that were once “nico to have” are now becoming a necessity. In this context, appropriate data collection becomes mandatory for greater transparency and the achievement of net-zero targets.

Lisette van Doorn, CEO of ULI Europe: “Our study shows that despite the transformation the office real estate market is undergoing, physical workplaces remain important for companies to attract and retain talent, instill corporate culture and improve employee productivity. However, on the tenant side, it is not yet conclusively clear how much space is needed and what the space should be. Therefore, they need a flexible strategy on the part of the landlords, with whom they are embarking on this journey together. At the same time, landlords are trying to position themselves for the future at this stage of dramatic structural change, with demand shifting toward more flexible and energy-efficient space, including comfort and services. They also face cyclical challenges such as rising interest rates, high inflation and construction costs, limited availability of equity and debt capital, and high capex requirements. While tenants are critically evaluating their needs and building features as leases expire, landlords may not enjoy the luxury of seeing the market improve, but may need to act in the short term to protect their rental income.”

Further information at germany.uli.org and europe.uli.org