Global corporate real estate trends in 2021
Those participating in the roundtable include:
After one month of 2021, could you discuss the current landscape when it comes to corporate real estate?
JL: The current landscape in corporate real estate across the majority of markets continues to be that of uncertainty – with the pandemic greatly impacting market activity and transactions. In Knight Frank’s Africa Market Pulse Survey, which was conducted at the onset of the pandemic, office landlords indicated that only 20% of office leasing deals were proceeding normally, while a majority (40%) were experiencing delays.
Overall, however, market performance has continued to be influenced by a range of factors beyond COVID-19. These have included low commodity prices in oil dependent economies, currency devaluation, ongoing recession in countries such as South Africa and hyperinflation in markets such as Harare, which are adversely impacting demand and returns. As such, we have noted that approximately 60% of the 28 cities in the prime office market we track have recorded rental declines in the period to Q3 2020.
AG: The social distancing and movement restrictions brought on by COVID-19 interfered with supply chains and services in the UAE and around the world. With many business activities interrupted in H1 2020, the office market came under pressure. Businesses reacted to the sudden change in market conditions and vacancies began to increase, leading to occupiers finding newfound leverage to negotiate. Now, landlords are more commonly offering incentives including deferrals, waivers, increased number of cheques and, in some cases, lower headline rents to existing lessees. Extended rent-free periods, increased CapEx contributions towards fit-out, reductions in notice periods and early break penalties are also becoming more common. Sellers and landlords are expected to realign asking prices towards the offer levels of purchasers and occupiers in the near term. Poorer quality assets are likely to experience the largest decrease whereas premium stock will see a more evenly balanced duel between negotiating parties.
However, Dubai’s non-oil private sector continued to show improvement in business conditions as evidenced by an increase from 50.9 in August to 51.5 in September of the seasonally adjusted IHS Markit Dubai Purchasing Managers' Index (PMI). A reading above 50 indicates expansion. The office sector is likewise expected to improve in the quarters ahead as companies return to full capacity in 2021.
RD: The current corporate real estate landscape is challenging owners and occupiers in unimaginable ways. As a result, organisations have a dilemma on their hands. Workplaces are close to empty and there’s too much costly unused office space going to waste: many offices are reporting 50% less desk space as a result of social distancing rules. Despite promising news of an effective vaccine, it is not yet approved, and even when experts predict it may take many months before we can expect social distancing to become a thing of the past. And so occupancy levels will be reduced for sometime.
As a result of strict quarantine measures and lockdowns around the world, organisations have been granted time to take a step back and to assess how they can keep people safe in this pandemic even when it is time to return to the office. Workplace technology exists to help provide comfort and assurances. There are solutions in the market that offer the ability to sense and learn when and where spaces are in use in order to keep them clean and compliant. Occupancy-based data can ensure heads of HR, facilities and corporate real estate (CRE) are aware of individual and collective behaviors, allowing them to make educated decisions on optimising real estate space while reducing the risk of transmission. Technology like this can do everything from provide the usage and cleaning history of a given desk so employees know when it was last used and when it was sanitised ahead of their arrival, to help staff plan their day at work so they are assigned a safe space with the colleagues they need to collaborate with.
How have you seen the industry evolve due to the pandemic?
JL: The pandemic has introduced a new dynamic for all types of occupiers in Africa. Hospitality, student housing and regional shopping centres are some of the sectors that have been negatively impacted so far. The office sector has also recorded reduced demand as a result of the shift toward remote working. While we are unlikely to witness an extreme shift to remote working, we anticipate that flexibility and collaboration are going to prove core values to any organisation going forward.
In the short to medium term, we will probably see a change in office layouts and design, as the overall employee density remains low, and in response to pandemic containment measures across different countries. In the long-run, office premises are likely to be utilised as collaborative spaces, where talent retention and health and wellness for employees will be a key aspect of the new office-as-a-service for corporates.
In a bid to attract and retain tenants, the majority of the landlords are also proving more willing to grant lease concessions and, in some cases, renegotiate existing lease terms.
Overall, In the longer term, we expect the majority of sectors to recover. For instance, sectors that span the entire human life cycle such as agriculture and healthcare continue to be in high demand. Niche differentiation in sectors such as office spaces and residential into grade A will also be critical, while the increasing need for connectivity will lead to high demand for data centres.
AG: Dubai’s office market witnessed a paradigm shift in workplace practices to adapt to social distancing precautions. The widespread deployment of virtual conferencing has helped many companies remain competitive and contactless, especially in the professional services industries. The effectiveness of these tools may vary by company and industry, but some companies will reconsider the need for traditional, or pre-pandemic, office space going forward.
Currently, the market situation has fuelled growth of the technology and digital sectors, underscoring the strategic goals of Smart Dubai 2021. As of Q3 2020, many of the enquiries for office space continue to come from the construction and related sectors while healthcare, beauty and pharma as well as the professional services sectors experienced modest demand compared to previous quarters. The technology sector made up approximately 15% of enquiries, and with the UAE announcing plans to prioritise digital economies post COVID-19, demand is expected to further increase in the future.
RD: There has been much exaggerated talk of the ‘death of the office’. In reality, we have seen a relatively small number of organisations looking to reduce their office footprint, despite the currently low occupancy levels. Instead, they are looking at creative ways to best optimise that space to support the return to work – and real-time data from occupancy based sensors is fuelling and enabling that creative approach to space optimisation.
However, some organisations are now accepting that the home office environment will be a permanent extension of their corporate estate portfolios and have been taking steps to ensure their staff are supported, comfortable and productive for the long-term. One of the key challenges for CRE heads entering 2021 will be to balance blended ‘home and office work’ in such a way that business objectives are met. As such, they are likely to work closely with HR and risk departments as organisations tackle the challenges of infection control along with the health and wellbeing of their people.
What technology and/or approaches have you seen emerge in the industry due to COVID-19, and how do these compare to before the outbreak?
JL: Remote access has been the most prevalent technological shift as a result of the pandemic. Corporate real estate has evolved, such as through the adoption of online management platforms, to aid in client and property management during the pandemic. For instance, in the context of agency, technology adoption has evolved from online listings to virtual reality. As a result of movement restrictions imposed during lockdown, virtual viewings in the majority of markets have surged. Knight Frank Kenya’s website, for example, registered a 47% increase in users over the months of May and June compared to the previous year. Virtual tours have effectively allowed potential tenants and buyers to have realistic ‘walkthrough’ tours of the properties.
We have also witnessed an increased focus on data and analytics in the corporate real estate sector, effectively aiding decision makers to predict market performance and plan accordingly.
While the transformation of real estate technology was already taking place pre-COVID, the pandemic has certainly accelerated this trend, underpinning its importance, and we only expect these trends to continue.
AG: Changes in the way that companies carry out day-to-day operations have been underway for years with disruptive technologies such as virtual viewing and conferencing. However, COVID-19 has fast-tracked the adoption of these technologies as social distancing and remote working have become more prevalent. To facilitate transparent communication amid restrictions and social distancing, various property listing platforms have launched interactive virtual tours of properties without the need to physically visit them.
In terms of new approaches, the Dubai government has introduced a virtual working programme that allows professionals to work overseas while residing in Dubai. On an annual basis, the programme costs AED1,054 plus medical insurance with valid UAE coverage and a processing fee for each person. In addition, the Dubai government recently declared an economic stimulus package of AED500 million, taking the total stimulus extended to AED6.8 billion, to support individuals and businesses in response to the pandemic. Many of these incentives will benefit small and medium-sized enterprises (SMEs) and the likely trend to emerge from this will be represented by the increasing demand for smaller office requirements.
RD: It is looking like the majority of organisations will turn to a hybrid working model to reduce the spread of the virus and accommodate employee and business needs. To this end, two strategies are proving popular:
● The ‘split group’ strategy involves separating employees into different weekly groups to support business continuity in the event that one group becomes infected
● The ‘split desk’ strategy enables the alternating usage of desks between days, creating maximum usage of the space overall and more time for cleaning teams to react to the demand.
Strategies like this require live data to be effective. Programs which monitor occupancy rates will play a central role in enabling the most appropriate measures to be put in place at any one time. Organisations must understand their occupancy threshold for safe practice and to keep track of when that threshold is neared.
When it comes to technology, it can help on all fronts. Employers will keep workplaces hygienic and allay people’s fears if they communicate the right information, at the right time and to the right level of detail – and the most effective way to do this is by providing employees with mobile apps and installing digital signage throughout the workplace. While there will always be a place for static posters, digital platforms allow for the instant and dynamic delivery of messages at the exact point they need to be consumed. Research by Intel has also found that digital signage captures 400% more views than static signage.
Digital signage will encourage employees to adopt and maintain the desired behaviors, including good hygiene and social distancing. But this isn’t limited to flashing messages reminding employees to wash their hands and avoid touching their face, though that is effective. Displaying live data on socially distanced spaces to use, cleaned space availability and cleaning regimes in place will help to guide staff and reduce cross-contamination. Facilities teams can also use the technology to both deliver methodical cleaning practices and reassure occupants by highlighting the preventative infection control measures that they are undertaking.
What are your predictions for the industry in 2021 and beyond?
JL: We anticipate that in the near-term, influences such as global tensions between the US and China, the Government’s abilities to effectively tackle the pandemic, currency changes, cost of capital and the shift to the ‘new normal’ will continue to impact performance in the corporate real estate sector in Africa.
However, in the long term we anticipate that ‘big picture trends’ that existed pre-COVID, will continue to influence the market. These include market resilience, innovation and health and wellness trends. Gardens and outdoor spaces featured at the top of home buyers wish-list in their homes of choice of at least 66% of the respondents in our Global Buyer Survey. Closer to home, we have observed buyer preference towards gated communities or developments that avail open spaces.
RD: The repurposing of office space to facilitate collaboration will be a trend for 2021 because it has been proven that, for many, home working supports individual focussed work but less so for social activities. CRE heads will need to ‘sell’ the office to those who have had a positive home working experience to willingly get them back and maximise attendance. Any office redesign must carefully consider the experiences people have had whilst working at home.
Offices will likely be carved into creative spaces for collaboration, innovation, and will also be a place to simply wind down and socialise. It will be important to ensure that the workforce is made aware of these investments now so they feel confident that they will be kept safe and supported when they return to the office.