14 minute read
How to solve the problem of slumping commercial property values by acting now
Major trends among workspace innovators
1. Technology is the enabler, but the workspace is the glue.
People are looking for inclusion and connection. Working from home (WFH) makes elements of life easier but can foment a sense of disconnection from colleagues and teams. The companies that are managing this contradiction best are those focused on long-term productivity and supporting the new generation entering the workforce, who will need special attention to ensure they get the upskilling previous generations have taken for granted. Many leaders, especially in knowledge-based industries such as the legal sector, are focusing in particular on generational and institutional knowledge, pairing graduates with seniors to learn the company and industry; younger folk will leave for competitors if their more established, experienced counterparts do not come to the office to educate, coach and mentor. The best at doing this have recognised that the workplace is a key component of differentiation in the war for talent.
2. Schedules are set deliberately, not casually.
To retain the benefits of flexible working that have
is required, especially given we are no longer in a low-vacancy market and there are more competitive propositions available to tenants.
We are also still waiting to see real estate align with hybrid working models and truly flexible, optimised workspaces. The country’s commercial zones are still mostly optimised on leases and are not structured for how people engage with their workspace.
At present, after the twoyear pandemic phase and many more years of underinvestment, New Zealand commercial real estate is falling further and further behind in terms of being ready for the future.
accrued over the past two years, progressive managers are proactively setting rules for teams and providing digital tools for people to connect with each other and manage agendas, so when people do come to the office they have maximum opportunity to connect with others in person and get the best out of the workspace. If the in-office/WFH schedule is set well in advance and coordinated between teams, people can have all the respective advantages of working in the office (interpersonal collaboration and conversation, change of scene) and at home (avoiding the commute, quiet and space to concentrate on deep work).
3. Thinking of ‘workspace’ in more fluid terms.
For many companies the “office” is no longer a single centralised location that is occupied five days a week. Innovative leaders are creating a network of workspaces where people work one day at a location convenient for some, another day at a different location convenient for others. They are also being creative with the use of space; research shows single workstations in open-plan settings are the least used, and they are steadily being replaced with purpose-built facilities for yoga practices or gym equipment, video gaming, or crèches or playrooms for children or pets. This follows the theme of allowing people to bring the best of working from home back into the shared workspace. In considering the use of space, human-centric design is increasingly important. This aligns workplace design with the work being performed, and away from bums-on-seats for line-of-sight management to spaces that are specifically designed for socialising, learning and collaboration. It is also possible to monitor occupancy in the current space (technology exists to support this) and feed this data into future iterations of office space that are suitable for long-term business HR planning and real-estate investment.
4. Centring purpose and sustainability.
Workers increasingly want to see evidence of how their companies are operating more responsibly and sustainably, from both a social and climate standpoint. These points go to purpose – why people want to work for a company – as an important driver of happiness at work, while 91 percent of Gen Z workers put sustainability as their top priority. Companies that are making office moves and communicating on the results (i.e. they can measure and discuss the sustainable impact of their choices of building and interior fit-out processes and materials) will reap the rewards of staff feeling heard and validated.
5. Treating time and attention as the most valuable elements.
These days people should be “earning the commute”, meaning there needs to be a purpose in travelling to work other than doing the job you can do from home. The commuting time should be justified by learning new skills, getting specialist training, or collective actions such as a sales team getting together to do calling sessions, managers and direct reports working together, coaching or strategy sessions, team-building sessions, special speakers and so on. When people are together, make it rewarding outside the focus on work. Many businesses that are changing premises are looking for locations that provide amenities, so people can use the commute to shop, dine or see a movie or show on “office days”.
The carbon factor
The flow-on effects from good data driven design are both economic and environmental. More efficient workspaces use less resources and yield a lower carbon footprint
have but a necessity, with impending legislation which will affect the bottom lines of businesses that are not currently working towards a carbon-neutral footprint.
On average, green buildings command rents that are eight percent higher than average. Many boards of large companies are making being neutral a governance agenda point. This signals that buildings that don’t comply will be left behind.
Many commercial buildings are privately owned, but are aging, with many dating back to the postWorld War II era, and most, especially in Wellington, needing some degree of remediation to comply with earthquake strengthening obligations.
The work done to date has been expensive and signals what will be a complete loss-running exercise.
Goodbye to sitting on land values
As with residential property, in the commercial sector New Zealand is one of only a few countries where the coming to an end.
As with many industries, we can expect what we are seeing in commercial real estate offshore to hit New Zealand, albeit with some delay This puts the onus on property owners and the business leaders who rent their premises to start innovating now if they want to dodge the worst of the body blow that is coming
for the sector.
The upside of establishing comprehensive workplace strategies in response to these threats is that it gives businesses space to advance sustainability measures that are meaningful and measurable and can feed into talent recruitment and retention strategies.
majority of the value sits in the land.
This factor, along with low competition and low availability of land, means there has not been a strict economic case for commercial owners to consistently invest in looking after their buildings.
With this massive capital appreciation, cash-rich commercial owners some-
Part of the decarbonisation movement involves finding new efficiencies and preserving those savings that have been hard-won through the pandemic
times haven’t even needed to tenant their buildings – they have just waited for the values to keep rising. But there are signs this era is
Changing the financial mindset
At a business level, much of the change must be driven by CFOs or other financial decision-makers, who need to move their mindset from cost to value. No longer can cost be assessed just by the dollar figure on the lease agreement.
Innovating businesses are thinking about the impact on people, based on the calculation that for service businesses, payroll is 50 percent of operating costs and lease or rent just seven.
Those who are focusing primarily on real estate cost savings might fall into the false economy trap: for example, a 20 percent saving on the lease would equal a 1.4 percent saving in overall costs, but if staff engagement or retention drops because of a decrease in office quality or location, the negative impact on the
business could outweigh that modest cost saving.
The top companies to work for – globally and locally – focus heavily on the workplace as a driver of engagement, from Facebook/ Meta to Google/Alphabet, Salesforce, TradeMe, 2 Degrees, PwC, Jarden, and Chorus.
Not coincidentally, these companies are also leading the thinking and conversation around long-term flexibility in work as a component of their strategies.
A popular metric for these top companies is to maintain 70 percent of overall
workspace (most have HQ and satellite offices) as core fixed space, and 30 percent as flexible or on-demand space.
They take advantage of favourable market conditions to secure new premises with high incentives to fund the new fit-out.
With New Zealand having the third-highest cost of fit-out globally but ranking 60th in rental costs, there is a prime opportunity for business owners and landlords to work together.
Tenants will need to accept slightly higher rents (bearing in mind that a 30 percent overall rent increase, when rent is seven percent of operating costs, adds just 2.1 percent to the bottom line), but that will enable the funding of the fit-out.
Where business own-
ers have been focused on securing the best rent deal, given all the variables they are better to home in on what kind of deal (rent versus incentives) will allow them to get the workspace they want.
A popular metric is to maintain 70 percent of overall workspace as core fixed space and 30 percent as flexible or on-demand space
Moving towards a post-waste workspace
Part of the decarbonisation movement involves finding new efficiencies and preserving those savings that have been hard-won through the pandemic.
Pre-COVID, office utilisation was at 50 percent, with almost all employees working full-time in the office. Now, with many employees wanting to work three days in the office and Work From Home (WFH) on two days, efficiency (in utilisation terms) drops to 30 percent.
The building sector (across all asset classes) contributes to 20 percent of New Zealand’s carbon emissions. Energy expenditure is massive, with large buildings being illuminated, powered, heated, cooled and ventilated all the time.
Therefore, when utilisation is 30 percent, it means 70 percent of this output is wasted. By finding solutions to increase utilisation, and by designing better and with flexibility to accommodate changing requirements without the need to move offices, we reduce waste
With New Zealand having the third-highest cost of fit-out globally but ranking 60th in rental costs, there is a prime opportunity for business owners and landlords to work together
and remove the churn of fit-out over the lifecycle of a building. Less demolition, construction and renovation work equals lower emitted carbon. Given that NZ$1 billion annual commercial rent figure for Auckland, there is the potential to improve the bottom line by 70 percent ($700 million) for companies through widespread adoption of workplace strategies that are focused on efficiencies and value rather than the bottom-line rent figure.
The caveat is that 100 percent utilisation is probably impossible to achieve, but 70 to 80 percent is highly realistic.
What the optimal workplace looks like in a post-pandemic work culture
As businesses are getting back to the office, including in hybrid models that are seeing many companies bringing workers in two or three days per week and otherwise working from home, a data-driven, human-centric approach is helping make workspaces more creative, productive and safe.
“The companies I work with are chiefly concerned about two things, both of which factor into the bottom line,” says Ferrandon. “First future-proofing companies for the next disruption, now that we have all seen just how serious and prolonged the business interruption can be, and second facilitating a hybrid model that will work for the long term in offering flexibility to employees in a competitive talent market.“
Office design that is informed by data-driven strategy aims to improve building utilisation through better attendance and activity-based working; the integration of flexible workspace solutions; and the incorporation of utilisation studies to show exactly which spaces are most used.
The flow-on effects from this are both economic and environmental, as more efficient workspaces use less resources and yield a lower carbon footprint, in line with larger decarbonisation programmes.
Technology has caught up to general company operations, and Studio DB data shows that over the next 18 months innovation in design will take workplaces to the next level to bring the best out of people.
In a recent Studio DB client survey, 62 percent of respondents said their workspace requires improvement, and 55 percent said leased office utilisation is among their main challenges, but they don’t know how to tackle it.
Unfortunately, most businesses have become accustomed over years to carrying surplus real estate because there was no alternative. But that is shifting, and traditional real estate can move with the times by embracing a more agile approach of creating working hubs instead of static long-term leases.
Workplace policies in this area are now focused on meaningful design and fitout of commercial spaces to promote employee engagement, innovation, collaboration and culture.
Return on investment
A key challenge around optimising the workspace through design is measuring the return on investment. Where the traditional cost management focus has been on rent and incentives, greater value improvements are seen in a broader approach which also incorporates building utilisation and sustainability factors – both people and climate.
Part of ROI measurement can include running employee engagement surveys that can be converted into reportable insights that help HR leaders, CEOs and directors make better, informed decisions about people and culture, operational and capital expenditure, and the direction of the business.
There are tremendous strategic and productivity insights to be gleaned from this approach, including around attrition, recruitment and retention of talent.
This post-pandemic, repositioning period gives all leaders a unique chance to align workplace policy (elements such as working hours and conditions) with workspace design.
Globally, companies like LinkedIn are ahead of the curve in empowering employees to choose if and how often they want to work remotely versus in the office.
Pierre Ferrandon is the head of research for Studio DB. He creates strategies for companies to implement hybrid working and optimise the workspace for productivity, profitability and employee engagement. Full information at Studio DB
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