Property sector facing big readjustment after COVID

The property sector will need to readjust as capital growth and investors are affected by the changing requirements of the corporate workspace, writes Selina Short.

Epidemics have always shaped our cities and their buildings. After bubonic plague struck Milan in 1484–85, Leonardo da Vinci reimagined the city in what was perhaps the first attempt at zoning. New York’s Central Park, described as “the lungs of the city” by its designer Frederick Law Olmsted, was created partly in response to the 1849 cholera outbreak. And modernist architects such as Le Corbusier and Alvar Aalto embraced a new type of building — one that favoured light, air and the outdoors — to prevent tuberculosis.

Disease has always driven great change in the design of our built environments and we are now seeing the role that cities — and their inherent density — play in spreading that disease.

There can be no doubt that deep structural changes are afoot. While our experience varies depending on our geography and our industry, we are all facing a new reality. All organisations, whether their headcount is three or 30,000, must now consider how the shock of the COVID-19 pandemic will impact people, jobs and the shape of the cities where we live, work and play — for many years to come.

Real estate is a local game that must respond to the unique needs of customers in that market. But we are already seeing trends emerging, and understanding these trends can help company directors as they grapple with their decision-making now and beyond the pandemic.

Commercial offices

The office has been the locus of work for the past century. “The office is dead” and “remote working isn’t so great after all” are two of many headlines capturing headspace over the past few months as we grapple with the global work-from-home experiment. While it might make good clickbait, it is too early to declare winners and losers. What we know is that every landlord and tenant must consider the far-reaching consequences of this crisis and how it will reshape real estate and their organisations. COVID-19 has dismantled decades of obstruction to remote working and forced a fundamental rethink of the office’s perceived value.

An office is an expensive line item in the cost ledger. When times are tough, space is an obvious place to start. Bank bosses are already talking about how tens of thousands of staff have “worked from kitchen benches” and wondered if they will ever need as much space again. Co-working had been expected to reach 30 per cent of the market by 2030, but some pundits predict we could now exceed that.

EY’s most recent staff survey echoes countless corporate surveys around the world, which unpack the upsides of working from home — flexibility, fewer distractions and no commute. Almost half of the 4500 EY employees surveyed want remote working to be their default position post-pandemic.

The Times recently published an analysis of mobile phone data showing that by early August, only 17 per cent of office staff had returned to work in the UK’s 63 largest cities. As tenants begin to rethink their real estate footprints, some analysts such as Goldman Sachs predict the value of offices will fall by as much as 30 per cent. Looking at the big picture, many of the offices currently sitting idle are owned by superannuation companies. In fact, more than 14.8 million of us have a stake in property through our superannuation, so the value of these office towers matters to all of us. However, before we write off the office altogether, it is not a simple equation of more remote working equals less office space. Some offices may be only able to accommodate a third of their workforce to comply with social distancing requirements. We’ll need all the space we can get, but this is a big challenge when office vacancies in Sydney and Melbourne were sitting at less than four per cent in January. And even once we get rid of this COVID-19 menace, will we ever want to sit as close together again?

The pandemic has also taught us that going to work — rather than stepping into your spare room — is critical for our social lives and self-esteem, not to mention osmosis learning and those serendipitous exchanges. So, expect to see fewer hot desks and more space for collaboration and learning. Expect more tracking apps and touchless technology as a powerful combination of automation, artificial intelligence, sensors and shared data platforms become the beating heart of the workplace. And expect more co-working as tenants opt for flexibility over permanent office space.

Retail and industrial

The online juggernaut had taken off well before the pandemic panic set in, and a lot of what we are seeing is an acceleration of existing trends. Online spending as a proportion of all retail sales has reached record highs. For example, in the UK, in April, ecommerce spending hit 30.7 per cent of all retail sales, compared to 24 per cent in March.

According to JLL, June’s 5.1 per cent national shopping centre vacancy rate was the highest in 20 years. But again, the story is nuanced. CBD retail has been decimated, but foot traffic in some regional centres has been higher than pre-COVID-19 averages. However, people are social animals, and the surge of customers returning to the shops after lockdowns is evidence that retail therapy is here to stay. That doesn’t mean reinvention isn’t required.

Retail owners were already thinking about how to reposition their assets pre-COVID. A surge in ecommerce this year has prompted some retailers to convert their shops into “dark stores” to cater solely to online shopping, but online fulfilment typically requires three times more space than bricks-and-mortar retail. We are also seeing “just in time” inventory practices revert to a “just in case” model, which demands around five to 10 per cent more space. We are seeing a rebalancing. Australia’s retail footprint may shrink in some places, but CBRE estimates we will need an additional 350,000sqm of new industrial and logistics space each year to accommodate online demand.

Selina Short is managing partner at EY Oceania Real Estate & Construction and a member of the Property Council of Australia National Cities Roundtable.

Healthy building, healthy workforce

As employers consider sending people back to the office, how can boards gain assurance they aren’t operating in a building that could make people sick? By Vyt Garnys and Tony Arnel FAICD.

As Australia enters its ninth month of the COVID-19 crisis, our city centres remain ghost towns, buildings are being mothballed and high-density towers have been compared to “vertical cruise ships”. A massive 4.3 million people — a third of Australians — have been working from home. With some companies returning to the office, what does best practice look like?

The best boards are asking and answering these questions by including the right scientific, occupational health and engineering expertise. In this way they can gain reasonable assurance that their buildings — whether they own the assets or are tenants — are safe and healthy.

Boards have always had an obligation to provide a safe workplace and the consequences of sick buildings are well known. However, the legal, financial and reputational risks of COVID-19 are potentially a ticking time bomb.

Sick buildings

Whether a building is healthy or dangerous is determined to a large degree by air quality — an issue that is in the spotlight thanks to COVID-19.

Many office workers spent 90 per cent of their time indoors, often breathing in unhealthy air from poorly serviced air-conditioning units, or chemicals from untested carpets or furniture, and squinting in badly lit boardrooms.

Researchers have drawn a clear link between indoor environment quality (IEQ) and human health for several decades. “Sick building syndrome”, named by the World Health Organization in a 1984 report, is a catch-all term for a range of illnesses caused by poor IEQ.

The impetus for investment in good IEQ has been about productivity and performance. One of the most respected studies, undertaken by Harvard University in 2016, found office environments with the highest air quality delivered a significant productivity uptick. This included a 31 per cent improvement in strategic thinking, a 38 per cent boost in focused activity, and a massive 73 per cent increase in crisis response. The study also found participants reported 30 per cent fewer sick building symptoms in the office environment with the best air quality.

A COVID-safe trinity

Gaining assurance that a workplace is safe and healthy during pandemics can be divided into three clear categories:

• Design considerations require both short-term fixes and longer-term thinking about the future of the workplace. Hot desks are out for now, but how will you reconfigure space for a hybrid workplace that accommodates both in-person and remote working?
• Operations include everything from HVAC (heating, ventilation and air-conditioning) systems and humidity control to cleaning regimes, materials and temperature checks.
• Behaviour, which is often the hardest to manage, requires organisations to consider safe practices in the workplace as well as the occupant’s journey from door to door.

There is a growing body of empirical evidence that high-performance buildings with sophisticated systems for ventilation, filtration and humidity reduce the spread of pathogens such as coronavirus. This is little comfort when around 80,000 of Australia’s mid-tier office buildings need upgrading.

But there is a silver lining. We’ve been talking about retrofitting older buildings for decades. Now we have an opportunity to accelerate these energy efficiency upgrades, improve filtration and humidity systems, and address infection control.

There’s also the added bonus that investments in these measures are a “jobs machine”. The Energy Efficiency Council estimates that a large-scale building upgrade program would create 120,000 job-years of employment.

While COVID-19 has severe consequences, what we are learning will also pay dividends each year during the influenza season, which costs the Australian economy $7b annually in lost productivity. A 2019 study found improving a building’s air quality reduced flu transmission.

We have three priorities for boards:

1. Define your risk profile: Identify and prioritise COVID-19 risks — with the help of independent scientific and engineering advice — in each of your buildings, depending on their typology, attributes, location, occupancy and demographics.
2. Develop a defensible plan: Defensible risk-management policies must address surfaces, air, waste, cleaning audits and occupancy protocols.
3. Draw on data: Rely on regular indoor air quality testing. Make proactive adjustments to optimise the health, wellbeing and productivity in your buildings and upgrade equipment and technology for the new challenge.

Dr Vyt Garnys is MD at CETEC environment quality consultancy. Tony Arnel FAICD is industry professor Deakin University Faculty of Science, Engineering and Built Environment, and a former global director sustainability at Norman Disney & Young.