A transition to hybrid working appears inevitable – but prepare for painful trial and error

When we return to the office, the long-term trend toward hybrid working appears irreversible. Employees are making clear that they value flexibility and, with many employers already signalling their intent to facilitate this, others will need to find a way to follow suit.

In addition to appeasing their workforce, businesses also see that they risk conceding competitive advantage to their peers if they fail to reduce office space and the associated costs.

But we only need to compare statements from heavyweights such as Goldman, Facebook and Google to see that approaches vary considerably.

These businesses have significant concerns about the practicalities of hybrid working, plus the impacts on productivity and employees’ personal and professional development.

Overall it is difficult to see any outcome other than a permanent reduction in demand for office space, with more robust demand for prime space in central locations and vacuums forming in secondary locations.

We believe that this transition will involve painful trial and error as businesses encounter the challenges of collaboration in a hybrid environment.

Overcoming these issues will be fundamental to how the office cements its future role as a collaboration-focussed ‘destination’ rather than a mandatory ‘workplace’. The successful office will need to work hard to stay relevant and attract an empowered workforce who can increasingly decide where to spend their working time.

In terms of winners and losers, it will be a tough environment for office landlords for the foreseeable future, especially those with portfolios in non-prime locations. For corporates embracing remote working, or any looking to sign a new lease, this presents an opportunity to take advantage of their enhanced negotiating leverage and significantly reduce their cost base.

What are the challenges for the flexible office? 

Firstly, there are the practicalities around co-ordination.  The thought of commuting five days a week now fills many with dread and arriving at the office to find your colleagues unexpectedly working remotely would be immensely frustrating. Equally, dialling into office-based meetings with poor teleconferencing facilities could be an isolating experience.

Secondly, many businesses believe hybrid working will limit collaboration and learning, inhibiting businesses creativity and effectiveness. Scheduled video calls may not be an adequate replacement for the natural benefits of in-person interaction.

Thirdly, individuals' personal and professional development could be restricted. This is a particular concern for junior members of staff, who naturally learn from being with and around more experienced colleagues.

Tenants and landlords will need to work hard to make the office an attractive destination for collaboration, whilst also facilitating contributions from those working remotely and ensuring professional and personal development can continue.

Secondary locations will come under pressure

It does appear certain that, on any given day, there will be fewer workers in individual offices and city centres collectively than there were prior to the pandemic.

Nevertheless, prime buildings in central locations will remain popular – most businesses expect to retain an office presence, young workers will continue to seek the opportunities and social interactions uniquely available in towns and cities.

Provided they are prepared to adapt, landlords in prime locations are still likely to find tenants, albeit they may find they will need to invest in collaboration spaces, outside spaces and additional services in order to continue to attract them, while also showing flexibility in pricing and lease lengths at least until the ‘new normal’ becomes clearer from 2022 onward.

Meanwhile, landlords in secondary locations will remain exposed to the overall reduction in demand. It is difficult to ascertain where these vacuums may form, being so early in the process, but landlords who are unable to adapt their premises for changing requirements, or who simply are not in the most convenient locations are likely to suffer the most.

Uncertain times for office landlords, opportunity for corporates

The balance of power in landlord and tenant negotiations has changed and will continue to evolve with changes in office supply/demand dynamics. 

For the foreseeable future, we expect tenants to benefit from increased availability of sites and being better placed to negotiate lower rents and/or shorter or more flexible lease terms. Tenants are also likely to place the onus on landlords to bear the cost of refurbishments and conversions to create collaboration-friendly space.

This a dangerous prospect for many landlords and their investors, who typically crave long term, stable income streams, and who have not contemplated the increased one-off costs of repurposing properties.

To mitigate the risk of reduced occupancy, landlords need to evaluate their portfolios and business plans now. Whilst a lack of alignment (and ongoing debate) on the future of the office means that it is unlikely that landlords will know all the answers now, continuous monitoring of developments and early engagement with tenants will be key to giving landlords the best chance possible of staying ahead of the curve.

This will ensure that landlords can act quickly to meet tenants' changing needs. Failure to do so may quickly result in their offices becoming obsolete, and their businesses coming under financial strain.

For corporates, there is an opportunity to re-define their real estate needs, either to manage down their real estate usage as a cost reduction lever, and/or negotiate hard with landlords in order to benefit from space better suited to the 'new normal' on attractive and flexible terms.