When we were told that our way of life and everything that we will experience post-COVID-19 will be defined by the pandemic, it was not an understatement. The normal which metamorphosed into the new normal high speeded towards the next new normal and the stages just kept expanding. Amidst all changes, the pandemic brought a seismic shift in the way that people work, prompting organisations worldwide to adapt to remote work setups practically overnight. The pandemic receded but the need for a hybrid work model emerged as a preferred choice and we have been living in a hybrid world since.
Interestingly, this blend of in-office and remote work is not only transforming the way we work but is also significantly impacting the global real estate market. The rise of remote and hybrid work setups has led to significant changes in the commercial real estate sector and urban landscapes worldwide.
Traditional business models thrived on the presence of employees in office buildings and city centres. However, with fewer individuals regularly commuting to work, real estate developers are faced with the challenge of dealing with surplus office space. Business leaders are also reevaluating their strategies to align with the changing expectations of their employees, who now have different preferences regarding work arrangements.
The shift has broader implications for city planners as well. Downtown areas, which once relied on a steady workforce to keep them vibrant, are now undergoing transformations due to changes in people’s preferences for where they live, work, and spend their leisure time. City planners are closely monitoring the changing landscape of residential offices, and recreational choices to make informed decisions about the future of their cities.
The dialogue around real estate is taking a new face mainly because of the shifting demands and opportunities. This is determining the trajectory of urban development and city planning.
Tale of (more than) two cities
The most visible change that occurred in the world of work was where and how people worked. As a result of these new behavioural patterns, numerous employees have opted to relocate away from the city centres to areas outside urban cores. This led to a decline in the number of individuals who both worked and resided near urban retail outlets, subsequently resulting in reduced shopping activity in these areas. While some of these shifts in behaviour have shown signs of moderation in recent months, certain changes persist, especially among office employees who are following hybrid work models.
For instance, between mid-2020 and mid-2022, the central urban areas of New York City experienced a 5% decline in their population, while San Francisco’s urban core saw a 7% decrease. The main reason being out-migration. This population shift has led to a notable increase in vacant spaces within these urban areas.
According to Mckinsey & Company, the changes in behaviour have already had significant impacts on the real estate market in what are often referred to as “superstar” cities. These are cities that have a higher-than-average share of global urban GDP and GDP growth. The cities that were under close scrutiny in this research conducted by McKinsey were Beijing, Houston, London, New York City, Paris, Munich, San Francisco, Shanghai and Tokyo. However, the research also accommodated a larger set of 17 superstar cities in six countries in order to better comprehend the behavioural patterns. Within the central areas of these superstar cities, there has been a substantial rise in the proportion of empty offices and retail spaces since 2019. Additionally, property prices for homes within these urban cores have seen slower growth compared to suburban areas and other cities.
Owing to the fact that location preferences have shifted due to the hybrid work system, urban centres that experienced minimal population growth compared to their surrounding suburbs shared common attributes such as expensive housing, a high concentration of office spaces, a significant workforce engaged in the knowledge economy (which was a sector that started experiencing a very high growth rate in hybrid work style), and limited retail establishments. These characteristics were also the same ones that influenced patterns of office attendance. Cities such as Dallas, London, New York, San Francisco, and Boston were particularly impacted by these trends. Overall, urban cores in the U.S were more affected by these shifts compared to their counterparts in Europe and Japan. This was partly because European and Japanese cities often feature mixed-use developments, where office, residential, and retail spaces co-exist in closer proximity. A living set-up that could comfortably accommodate the hybrid work model.
New priorities, new spaces
The hybrid work model also meant that what was once an office yesterday could perhaps no longer be only an office tomorrow. Because hybrid work has not only changed how employees navigate themselves in professional settings but also how city residents live.
In an article about ‘Hybrid work and the future of cities’, Kevin Madden, Aon Real Estate’s Practice Leader illustrates how there has been a shift in housing preferences particularly among millennials and Gen Z individuals. Previously, there was a trend toward smaller apartments, with the average one-bedroom unit shrinking to around 700 to 800 square feet. However, this trend is now changing. People across different age groups are now seeking larger apartments that include space for a designated work area or home office. This change in preference is directly linked to the increase in remote work arrangements.
The other side of this narrative is that these evolving preferences are not only influencing the type of homes that people are seeking for but it is also impacting the priorities in office real estate. As employees begin to return to office, corporate workspaces are undergoing transformations to ensure that employees view the office environment as a valuable and attractive option compared to remote work.
Madden emphasises on how smart buildings that can accommodate the technology that tenants want to use has become the need of the hour. He draws a parallel between the office industry’s evolution and the experiential shift that the retail industry has experienced. Offices have a new focus and that is providing experiences that go beyond just a place to work. This is evident in the incorporation of amenities like pickleball courts within office buildings, catering to tenants’ desires for unique and engaging features.
How is real estate being reshaped?
The hybrid work model is here to stay. That is a given. Therefore it is only apt that the real estate industry finds a way to fall in line with its requirements. As more individuals opt to go hybrid, one avenue that real estate can venture into is repurposing existing properties into functional home offices. Innovative solutions like converting spare rooms or building detached office spaces can cater to this demand. Another opportunity involves incorporating coworking spaces into residential communities, fostering collaboration and a sense of community among remote workers as well. Similarly, office spaces need to rethink how they can take the growing demands into consideration so that they don’t drive employees away.
The challenges faced by the building, real estate and infrastructure sectors may appear overwhelming, but history has shown that such challenges are not without precedent. Major shifts in living and working patterns, such as the suburban expansion after World War II and the subsequent return to more residential city living, have always been present. The current catalyst for change is hybrid work.
An attractive trait of real estate is its ability to be dynamic and adaptable. Just as the industry has always made the necessary changes to respond to new circumstances, it will continue to do so in response to hybrid work and its impact on how people live and work.
(Sandunlekha Ekanayake)