In responding to the operational challenges of the post-pandemic era, corporate real estate portfolios will display a mix of core and flex space, the relocation of core facilities to avert obsolescence and save costs, and a greater alignment to ESG ambitions.
The complex mix of pandemic legacy issues, the search for operational resilience transformational routes, changing workstyles and a broader set of strategic influences will shape future corporate real estate portfolios. The quantum of space required to deliver change and mitigate risk is more varied than many assessments suggest. Much of the space within existing portfolios cannot provide the agility or functionality that occupiers now require. Consequently, occupiers will take flight in the search for new solutions that not only support cost efficiency and operational productivity but also avoid the growing spectre of obsolescence.
How much space?
Since the onset of the pandemic, there has been much conjecture about the quantum of office space occupiers will require in a post-Covid world. Transactions worldwide have been mobilised as evidence of the magnitude of change likely. Articles have emerged weekly, calling out the 'magic metric' determining future portfolio size. Is it a 40% reduction in floorspace, 25% or a relatively modest 10% fall? Such an approach needs to be better and recognise two things.
First, in the cadence of 'experiment', 'evaluate', and 'evolve', many occupiers have yet to decide on their future space needs. Some view this as 'kicking the can down the tracks', but we regard it as further evidence of carefully considered corporate real estate management.
Second, in a rush to generalise, these interpretations ignore that every occupier has a different real estate legacy, a different pandemic experience, a different workstyle and a different end goal. Commentators should more readily acknowledge the complexity and variation in the decision-making of occupiers.
Results from the latest (Y)OUR SPACE survey ably illustrates this variation and nuance. The projected amount of space held in occupied portfolios will be subject to change over the next three years but, as Figure 1 shows, not necessarily in a downward direction.
55% of all respondents expect to see an increase in their total portfolio size between now and 2026, with the balance split almost evenly between those anticipating either stability or a decrease. This data contrasts with the findings of the 2nd edition of (Y)OUR SPACE which showed expansionary intent for a third of respondents. Of those anticipating expansion, 4 in 10 believe their global footprint will increase by more than 10% of its current size.
In contrast, just 5% of respondents expect to see portfolios reduce by more than 20% of their existing size.
The previously noted expansion into new geographical markets and other offensive transformation strategies contribute here. At the same time, a more settled picture around future workstyles, their implications for the rate of office re-occupancy, and the generosity of the space presented to those using the office will all be determinants of the future quantum of space.
The positive picture does have further nuance, with variation in terms of the size and sector of each respondent. Almost half of those largest companies responding - those employing more than 50,000 people - expect a reduction in total portfolio size - more than double the average across the entire sample. However, one-third are also expecting portfolio growth. Such numbers suggest that these larger organisations have more developed and defined plans to adjust their portfolios, with just 15% expecting stability. The converse is true for smaller companies - those employing up to 1,000 people - with 63% expecting expansion and only 13% expecting a reduction in overall portfolio quantum.
At a sector level, TMT, Business Services, and, perhaps surprisingly, Financial Services have the most expansionary intent out to 2026, with more than 55% of respondents from each sector anticipating portfolio growth.
A place for flex
Much talk has been about the rise of flex, managed and serviced space since we started (Y)OUR SPACE in 2018. Given the uncertainties of the post-pandemic operating environment, flexible space is often seen as a preferred route for corporate occupiers to achieve increased occupational agility.
Our latest (Y)OUR SPACE data does suggest that flexible space has a place in corporate portfolios. 37% of respondents believe that the proportion of flex space in their portfolio will be 'increased' or 'much increased' over the next three years. But there are limitations at work.
First, 30% of respondents identified the inability of landlords to offer flexibility as their number one ranked frustration as a customer in global real estate markets. Although we have seen new delivery models emerge - either through operators, conventional landlords, or both working in partnership - corporate occupiers still have a clear perception that more prevalent flexible solutions are required.
Second, few occupiers are keen on a comprehensive approach that puts most of their occupied space into the flex market. The (Y)OUR SPACE data indicates that flex is only ever likely to constitute up to 20% of the total portfolio for the bulk - more than three-quarters - of respondents (Figure 2). This finding validates the increasingly popular idea of a 'core and flex' portfolio management model.
Relocating core facilities
The core and HQ facilities within corporate portfolios are subject to more relocation pressures. As Figure 3 illustrates, 47% of respondents believe it is 'fairly likely', 'likely' or 'definite' that they will be relocating such facilities within the next three years - an increase from the 40% who thought similarly in our 2021 report. Smaller companies within our sample are more prone to such relocations, but interestingly only 9% of the larger companies we surveyed were dismissive of any future relocation. This position reflects two dynamics found in the survey data.
First, the cost-saving potential that derives from relocating and reconfiguring core facilities. 47% of all respondents anticipating a near-term relocation of core office facilities cited their main driver as the cost savings achievable (Figure 4). This response is understandable given that core/HQ offices are often located in the most expensive submarkets in the most expensive office markets in the world and represent a sizeable proportion of a company's overall real estate spend. Cost-saving strategies, however, must be seen in context. Only 40% of all respondents to (Y)OUR SPACE have a specified real estate cost-saving target in place, and of those, only 19% (27 companies) are seeking savings of more than 20% of their existing expenditure.
For most, the potential relocation of core office facilities is much less about the level of cost saving and much more about the effective return on capital expenditure. In light of changing workstyles and the recent pandemic experience, companies are questioning whether their core offices remain fit for purpose. As Figure 4 shows, many are concluding that they are not, that their core offices are relics from a bygone age of work where the office was the only workplace setting and the location for all aspects of work. Consequently, the second and third-highest-ranked drivers of relocation were the effect of changing workstyles on the qualities (38% of all respondents) and quantum (37%) of these core facilities. In essence, the potential future mobility of core facilities is a response to the increasing challenge of functional obsolescence - that is, offices no longer fit for modern operational purposes. The flight of occupiers aims to address the current mismatch between the existing workplace and its future purpose and, in doing so, will enable a more prudent, efficient use of capital expenditure.
Closing the gap between ambition and action on ESG
The functional obsolescence of occupied real estate is only one part of the obsolescence equation. Amid tightening regulation and more developed and ambitious corporate strategies, ESG considerations extend the challenges of physical obsolescence and are upending supply dynamics across global office markets.
This report has noted the strategic business issues with which real estate most strongly aligns. ESG ranks 6th in that listing and is identified by almost 1 in 5 survey respondents as such. This result represents an improvement of 4 ranking places since our 2021 survey. It suggests that the gap between corporate ambition and real estate action, which we identified in the second edition of (Y)OUR SPACE, is slowly closing.
The influence of ESG considerations on real estate decision-making is increasing too. As Figure 5 shows, nearly three-quarters of respondents view their broader corporate ESG strategy as having either a 'moderate' or 'significant' effect on their real estate decision-making over the next three years - compared to just over one-half of respondents in 2021. This effect is particularly true of the largest organisations responding to our survey and is a function of the increased scrutiny on big business from investors, staff, and regulators.
Greater intent is also seen in data highlighting the proportion of respondents' future real estate portfolios that will carry a sustainability accreditation. 51% of all respondents expect the number of accredited buildings in their portfolio to be 'increased' or 'much increased' over the next three years. When assessing the proportion of future portfolios that will carry accreditations (Figure 6), less than half (46%) of respondents expect a quarter or more of their future portfolio to be accredited, which could be viewed as disappointing. But this is a clear improvement from the 25% of respondents who say they are in such a position today. This finding again points to a closing gap between ambition and action and growing momentum on ESG. However, the climate crisis' severity is such that the cadence will need to increase further.
A significant restructuring of corporate real estate portfolios will characterise the next cycle. CRE leaders will need to strike a careful balance between supporting strategic intent, avoiding operational risk and delivering strategies and solutions that are financially efficient. That is quite a balancing act. But the resilience and performance of the underlying business ultimately depend upon achieving it and managing the complexity.