Outlook 2021: Post-pandemic spaces reimagined

3D rendering of an office interior with social distancing safety measures (Image: AdobeStock/FrankBoston)

Offices will need to change if workers are to return, while mixed-use will offer flexibility.  

The office sector will change and learn from retail and hospitality, experts have told Real Asset Insight. “In future working in an office will be more of an experience, like retail and hospitality,” says Alice Breheny, global head of research at Nuveen Real Estate. “It will be challenging to strike a balance between what landlords want and what occupiers want.”

The jury is still out on the home-working trend and whether it will have a long-term impact on the sector, but it is reasonable to expect more flexibility and more of an emphasis on collaboration. The pandemic precipitated change and a reassessment of priorities, just as the rise of e-commerce has forced bricks and mortar retail to innovate and be more creative.

“Covid-19 has been the online retail moment for the office sector,” says Nick Axford, principal, global director of research at Avison Young. “In future owners and occupiers will be working together to create a good environment and a curated experience.” 

Making offices healthy, safe, pleasant places is key in attracting workers back and in retaining them. “The war for talent has gone cold, but when we need to pull people back into the workplace competition will heat up again,” says Simon Martin, head of investment strategy at Tristan Capital Partners. 

‘People are delaying decisions now, so it is difficult to make predictions. It’ll take a whole lease renewal cycle to make our assessment.’ 

Alice Breheny, Nuveen

“We will return to the office and curating spaces will be very important,” adds Kim Politzer, director, head of research European real estate at Fidelity International. “But you cannot take the behavioural science approach, it is impossible to rely on past experience in this extraordinary time and predict how people will behave when it’s over.”

We need to step back and wait to assess what was short-term noise and what are the long-term effects of the changes we have seen since the outbreak of the pandemic last year. “People are delaying decisions now, so it is difficult to make predictions,” says Breheny. “It’ll take a whole lease renewal cycle to make our assessment.” 

Offices should not be all put in the same basket because there are profound differences in how they are used and needed depending on the type of tenant.

“Life sciences and tech are very keen to bring people together to collaborate, while call centres are happy for people to work from home,” says Martin. “There are different patterns of office occupancy for high-knowledge sectors.”

More flexibility 

As demand for flexibility grows, mixed-use schemes could provide the answer. “Mixed-use is the future because these schemes can deliver the flexibility that tenants now demand,” says Andrew Angeli, head of European strategy and research at CBRE Global Investors. “It is a vibrant sector that also delivers really good risk-adjusted returns.”

It’s also an incentive to much-needed regeneration in urban areas. “There’s a clear preference in Europe for renovating existing stock, yet less than 1% is repurposed every year,” says Angeli. “It is essential to ramp it up.” 

‘It is impossible to rely on past experience in this extraordinary time and predict how people will behave when it’s over.’ 

Kim Politzer, Fidelity International

Mixed-use schemes are changing and evolving: they used to be retail-led, but now the spaces are being reimagined in line with new requirements and trends.

“Flexibility is key, because the most compelling pieces of real estate don’t fit neatly into a box anymore,” says Breheny. “Mixed-use used to be at a discount, but now it’s at a premium because it gives you an opportunity to tick all the boxes, from environment to community.”

The 15-minute city

The renewed interest in mixed-use fits in with the concept of the 15-minute city, which originated in France and has been getting more traction during the last year of lockdowns.

People are more reluctant to commute and travel long distances for their various work and leisure activities and have taken a renewed interest in their local communities.

“The pandemic has led to similarities between America and Europe, with deserted city centres and a resurgence of interest in local neighbourhoods,” says Lee Menifee, head of Americas investment research at PGIM Real Estate. “But mixed-use and the 15-minute city pivot on infrastructure investments, which are high in Asia but not high enough in the US or Europe.”

Mixed-use and the 15-minute city principle were to the fore when Argent Related set out its vision for new north London neighbourhood, Brent Cross Town

Investments need careful planning and cooperation between the private and public sector. Local authorities want more commitment for social infrastructure and communities want better places to live. 

“The 15-minute city enriches the community and it’s a real opportunity, but it needs a good planning framework, it shouldn’t be a quick mix of resi and accidental retail,” explains Politzer. “Real estate has to be at the heart of social value initiatives, but you can’t pivot portfolios overnight and you also need to have active public/private partnerships.” 

The direction of travel is clear: there will be more impact investing and more attention paid to affordable housing. “Some institutions are still building up the skills to invest in these sectors,” says Politzer. “But they will increasingly become part of mainstream portfolios.”

The pandemic has led to a shift in investors’ attitudes that could be permanent. “This is such a different crisis from the GFC,” says Menifee. “We’ve seen more commitment, more attention to inclusion and ESG themes. I expected interest in impact investing to decline, but instead it’s accelerated.”

10 key trends for 2021

Last year’s upheaval has changed the real estate market and accelerated some trends that were already in evidence. “We’ve identified ten key issues that have the potential to profoundly influence our world and the role of real estate within it,” explains Nick Axford, principal, global director of research at property company Avison Young.

1. (De)Globalisation 2.0 
The pandemic, travel restrictions and concerns over our carbon footprint have given added impetus to regionalisation and localisation and have led to the derisking of supply chains. “To give an example, 40% of Fortune 100 companies had direct suppliers in Wuhan, the epicentre of the pandemic, highlighting the level of risk,” notes Axford.

2. Home working
Many people have adapted well to remote working, find they are productive and glad they don’t have the daily commute, but they do miss the exchange of ideas and impromptu team meetings. “Flexible working is here to stay but there’s a big future for the office,” says Axford.

3. Workplace experience
To encourage people back to the office, landlords and employers will have to personalise the space and offer seamless tech integration and a curated experience. The soulless open-plan office is dead.

‘Investors have realised that climate change in the future is investment risk today.’ 

Nick Axford, Avison Young

4. Portfolio metamorphosis
Operational flexibility will be needed to adjust to ever-changing needs in a cost-effective way. “Covid-19 has provided a real Ctrl-Alt-Delete moment – an opportunity to bring about change and experiment,” says Axford.

5. Managing expectations
This concerns the realisation during 2020 that relationships count and the way you negotiate and deal with people is crucial. 

6. Hyper-locality 
The rapid growth of online shopping in all areas of retail has made the last mile critical and led to a lot of repurposing to click-and-collect and innovation in micro-fulfilment at a local level.

7. Love thy neighbourhood
As urban centres have hollowed out during the pandemic and people have re-discovered their local areas, sparking a new interest in suburban retail and local offices, which had a better rental and value performance.

8. Risky business
Capital has been reallocated to take environmental issues into account. “Investors have realised that climate change in the future is investment risk today,” says Axford. 

9. Building a recovery 
A key plank of countries’ strategies will be investments in infrastructure, both traditional like railways and new like data centres or electric charging points. 

10. Measure for Measure: how do you measure national success correctly?
While GDP remains an important statistic, there is more focus on quality, rather than quantity of growth as well as the need to balance profit with the impact on people and the planet. 

“Our purpose as a global real estate adviser is to create real economic, social and environmental value,” concludes Axford.