ULI: Office Sector in ‘Full State of Flux’

Offices are here to stay, but the sector is in ‘a full state of flux,’ said the Urban Land Institute, Washington, D.C., and Instant Group, London.

“The office market may be rapidly evolving, but the physical workspace is here to stay. It just may look different than it used to,” said Billy Grayson, Executive Vice President of Centers and Initiatives with ULI. “Both employer and employee needs are continuing to shift with each phase of the pandemic, and the industry is still learning how to navigate these changes. But one thing is clear: adapting as nimbly as possible will set property owners and occupiers up for success.”

Office occupiers are still trying to figure out new activity-based workplace strategies and hybrid working patterns, leading to demands for a flexible approach from landlords who are trying to cope with cyclical challenges following increasing interest rates, ongoing high inflation and construction costs, ULI and Instant Group said in Bridging the Occupier-Landlord Gap For the Future of Workspace.

Only 14 percent of occupiers believe their existing workspace portfolios align completely with their business objectives and strategies, the report noted. Property owners (80 percent) even more than occupiers (75 percent) expect greater lease flexibility and agility over the next five years. Most agreed that new lease structures will allow occupiers to grow and shrink their office footprint within a single contract.

“The way of the future will be much more of a partnership between landlord and occupier than previous landlord-tenant relationships,” said Ben Wright, Executive Director of Partnerships with Instant Group.

The demand for shorter, more flexible leases and pay-per-use services calls for business model reinventions, the report said; 62 percent of landlords reported expecting a decrease in capital values with the current valuation model, which only awards long-term contracts.

“With the office provider evolving from a space to space-as-a-service approach focusing on operational management of buildings, a new approach to real estate valuations is needed,” the report said. “Valuations need to acknowledge the value of providing additional services and amenities, building partnerships between landlords and occupiers, and a strong brand and reputation, while also recognizing the impact of flexibility and varying lease lengths.”

For landlords, the time to improve energy efficiency is now, the report said. “While ESG is a major focus for occupiers, less than two percent of asset owners feel they have the required capex to respond to ESG legislation-related requirements. With occupiers focused on reducing overall occupancy costs, improved energy efficiency is a prerequisite for landlords to retain tenants and preserve rental income. Tech features, like monitoring occupancy and energy efficiency, that were previously ‘nice to have’, will now be necessary, with data-capture essential to boosting transparency and achieving net zero targets.”