Smart Buildings

Buyer’s Market Triggers a Flight-to-Quality in Commercial Real Estate

As the world grapples with the profound impact of the COVID-19 pandemic, the commercial real estate (CRE) sector finds itself at a pivotal moment. The unprecedented shift towards remote and hybrid work has left businesses questioning the traditional office space model, and the CRE market is now compelled to innovate or risk obsolescence. Our new research on the IoT in Smart Buildings (BIoT) delves into the uncharted territory of the post-pandemic office real estate landscape, highlighting the emerging trends and strategies that will define the future of workspaces. By demonstrating that many businesses could continue to operate effectively without all employees working under the same roof, the pandemic accelerated the shift towards remote and hybrid work, leading to radical changes in the demand for office real estate. Even with the pandemic's waning threat, many employees still prefer the flexibility offered by hybrid work models. As of April 2022, people worked remotely about 39% of the […]

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As the world grapples with the profound impact of the COVID-19 pandemic, the commercial real estate (CRE) sector finds itself at a pivotal moment. The unprecedented shift towards remote and hybrid work has left businesses questioning the traditional office space model, and the CRE market is now compelled to innovate or risk obsolescence. Our new research on the IoT in Smart Buildings (BIoT) delves into the uncharted territory of the post-pandemic office real estate landscape, highlighting the emerging trends and strategies that will define the future of workspaces.

By demonstrating that many businesses could continue to operate effectively without all employees working under the same roof, the pandemic accelerated the shift towards remote and hybrid work, leading to radical changes in the demand for office real estate. Even with the pandemic's waning threat, many employees still prefer the flexibility offered by hybrid work models. As of April 2022, people worked remotely about 39% of the time, and 58% of workers were allowed to work remotely at least once a week, according to data from Pew Research and McKinsey studies explored in our report.

“The Commercial Real Estate sector currently faces a myriad of challenges and uncertainties, forcing developers to make tough decisions across various geographic and vertical markets. Following a rapid recovery in 2021, and mixed results in 2022, the sector sees clouds on the horizon for 2023, as it grapples with the long-term shift towards remote and hybrid working practices,” our study forecasts. “Opinion amongst CRE analysts as to how prolonged a downturn might prove to be remains divided, and the uncertain outlook is likely to weigh on market sentiments until there are distinct cues that headwinds are dissipating.”

A significant number of companies have now permanently transitioned to remote or hybrid work models, and while office attendance remains essential for some companies, many employees desire the autonomy to choose where and when they work. As a result, businesses are reevaluating their investments in physical office spaces and exploring more efficient space utilization strategies presented by the BIoT.

“More office workers are back at their desks than a year ago, but attendance at office buildings in most global cities is still well below pre-pandemic levels,” our comprehensive new report explains. “As companies find an optimal balance over the next few years, office utilization and the space needed per worker will reach a new equilibrium that could ultimately reduce demand for office space per employee by up to 15% from the pre-pandemic norm.”

Our research found little indication of leasing activity rebounding to pre-pandemic levels, especially given the looming threat of a recession, dashing landlord hopes. It has become clear that the pandemic has reduced underlying demand for office space and that inherent "lag in the system," caused by longer-term leases signed before the pandemic, masks the reality of these longer-term effects. Ultimately, the profound impact of hybrid and remote work on workspace demand in office real estate is now undeniable.

Commercial Real Estate Flight to Quality

“There is a growing consensus among major players in the commercial real estate market that we are witnessing a ‘Flight to Quality’, particularly in relation to office space demand,” reads our new BIoT report. “Prospective tenants are placing a greater emphasis on high-quality amenities, ESG credentials, wellbeing, and digital connectivity, which are crucial in attracting and retaining talent. These factors are proving critical in encouraging workers to return to the office, as well as attracting and retaining talent over time.”

Top-tier office buildings featuring amenities that promote employee wellness and engagement are likely to capture the majority of occupier interest. Office spaces that support a company's environmental and social objectives will also hold an edge over competitors. And, while offices situated in bustling city centers are expected to fare well, older buildings with outdated amenities may struggle to attract tenants, resulting in a surplus of outdated vacant spaces and increased overall vacancy rates in many cities.

The report covers numerous studies that have investigated the potential impact of smart, eco-friendly, and connected technologies on rental and sales values, providing substantial evidence that businesses are willing to pay a premium for higher quality spaces. In the current commercial real estate market, especially office building, the buyers and lessees have most of the bargaining power. This change has motivated landlords to modify their business approaches and leasing management practices to better cater to tenants' evolving needs.

In a 2022 survey by the Visual Lease Data Institute, nearly all participating landlords encountered tenant requests for lease modifications due to the COVID-19 pandemic. As a result, tenants now prioritize flexible and adaptive leasing terms when looking for the ideal rental agreement. This shift has led to a heightened emphasis on aspects such as subleasing, adaptable termination conditions, and shorter or customizable leasing terms, which have become essential negotiation points for property owners attempting to fill vacancies.

“The slow and uneven recovery in many global office markets in the aftermath of the pandemic is creating a deep divide between prime and secondary office buildings that seems likely to widen over the coming years. The growing consensus that the best buildings will succeed in attracting new tenants and commanding premium rents or prices, means that failing to invest enough in technology upgrades to buildings could prove short-sighted.”

The commercial real estate sector's ability to adapt and evolve amidst the ongoing shift towards remote and hybrid work will determine its future success. As the lines between primary and secondary office buildings become more pronounced, the importance of aligning with tenants' evolving needs and expectations cannot be overstated. With a growing focus on sustainability, wellbeing, and digital connectivity, the office real estate market must embrace these key trends and reimagine the purpose of physical workspaces.

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