As the era of hybrid work unfolds, businesses are discovering that they don’t require expansive premises, which could result in a significant amount of commercial real estate becoming vacant in the near future1.
As companies shrink in the face of hybrid work, deserted offices could transform into ‘luxury apartments with minimal sunlight’ – or they could present an opportunity to reshape city centers. With more employees opting to work from home, many companies are realizing that they need smaller, but higher-quality offices1.
Data from global commercial real estate firm JLL reveals that 48% of clients in major markets, including the UK, Germany, and France, are looking to reduce their footprints in the next three to five years1. “Our clients are figuring out how to utilize their existing space by analyzing data from recent years to formulate long-term plans,” says Stephanie Hyde, CEO UK and CEO EMEA Markets at JLL1.
This impending corporate downsizing is poised to have massive implications for the real estate industry. As more leases expire, experts predict a surge of available commercial space in the market1. According to March 2024 data from workplace research firm Leesman, total space reductions could reach 40% across its global client base of 766 firms1.
In the quest for superior workplaces, the offices left behind may remain vacant. “More organizations are seeking spaces that enhance the workday for employees, in more appealing parts of the city,” says Tim Oldman, founder and CEO of Leesman, based in London1.
Not all empty buildings can be upgraded to meet new market demands, nor retrofitted into residential units1. Businesses are also becoming more discerning about where to establish their headquarters, says Duncan Swinhoe, managing principal for Europe at design and architecture firm Gensler, in London1.
The shift in corporate real estate is not just about reducing space, but also about reimagining it. The future of workspaces lies in creating environments that foster collaboration, innovation, and productivity.
Companies are now focusing on creating ‘destination workplaces’ that employees want to come to, rather than have to. These spaces are designed to be attractive, comfortable, and equipped with the latest technology. They offer a variety of settings to suit different work styles and tasks, from quiet areas for focused work to collaborative spaces for team meetings.
However, the transition won’t be easy. It requires a significant investment in redesigning and refurbishing existing spaces. Moreover, there’s a need for a cultural shift within organizations to embrace new ways of working.
The transformation of corporate real estate also has implications for city planning and development. As office buildings become vacant, they could be repurposed for other uses, such as residential or community spaces. This could lead to a more diverse and vibrant urban landscape.
- Economic Conditions: The economic climate plays a significant role in determining commercial property prices12. For instance, the UK commercial property market experienced a steep drop in buyer activity in 2023 due to economic difficulties1. However, it is expected to recover modestly in 20242.
- Interest Rates: Higher interest rates can lead to a decline in buyer activity and downward adjustments in valuations1. For example, all-property capital values in the UK fell by 20% since July 2022 due to a significant tightening of monetary policy1.
- Market Trends: The shift towards remote and hybrid work has led to a decrease in demand for commercial spaces, resulting in a drop in prices12. However, this also presents an opportunity for long-term investors to acquire property at discounted prices3.
- Sector-Specific Impacts: Different sectors of the commercial property market may experience varying impacts. For instance, the industrial sector in the UK saw a small recovery of 1.4% in 2023 after a sharp fall of 21% during 20222.
- Inflation and Economic Growth: Commercial property prices have a relatively loose link with inflation, and a much stronger one with economic growth4. Rental growth will benefit from the continued strong economic recovery in many sectors4.
- Location and Amenities: Factors such as location, property size, quality, amenities, proximity to transportation, and local regulations also influence the price of commercial properties5.
The impact on commercial property prices is multifaceted and influenced by a variety of factors. Here are some key points:
In conclusion, the impact on commercial property prices is complex and influenced by a multitude of factors. It’s important for investors and businesses to stay informed about these trends and consider them when making decisions about commercial real estate.