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WFH and its impact on Australian offices and tenants

The world is beginning to come to terms with the COVID-19 pandemic and the broad range of potential impacts for the Australian commercial real estate sector. Ultimately, the nature of human interaction during and post COVID-19 will impact real estate demand and drive change in some sectors.

When will people return to the office?

For the office sector, short-term shifts in demand will relate to how the virus outbreak continues to unfold and the extent to which employees feel comfortable returning to the office. More importantly for investors is how this pandemic will impact the long-term demand for office space. This will depend on the trade-off between the cost of occupation and the productivity trade-off between working from home (WFH) and working in an office.

WFH is not a new concept, especially for large corporate tenants that strive to provide flexible working arrangements for their employees. Until now, shared workstations (or ‘hot-desking’) has enabled employers to decrease their office space over time. The arrival of COVID-19 will further evolve WFH policies and has most employers thinking about what is best for their business. Many global firms have already announced changes to their WFH policies, and collaborative working technologies such as Microsoft Teams, Zoom, GoToMeeting and Webex have advanced in the wake of the virus-induced lockdown.

Notwithstanding these changes, several factors are likely to limit the impact on office floorspace demand. In the short term, workplace densities have decreased to enable social distancing. The longer-term trend of office densification could be reversed if organisations implement measures to mitigate the potential risks of future outbreaks. Shared workstations will be less appealing, and in some instances may even be regulated against. There are also many roles that are unable to be shifted to a home location for various reasons, including for security and insurance purposes.

Most businesses though, will have productivity and risk management at the centre of any decision about future office space requirements. WFH has never been trialled to this scale, and the productivity results and risk outcomes from this forced experiment will not be fully understood for some time.

Productivity and office design

Historically, providing well located, quality office space has been a means to attract and retain talent. Firms have invested large amounts of capital on office fit-outs to promote productivity and enable higher office densities (i.e. more people per floor). Studies have found a very clear relationship between indoor environments and employees’ attitudes, behaviours, satisfaction and work performance.

A wide range of factors are taken into account when considering office design and include room temperatures, air and water quality, lighting, noise, layout of individual workspaces and workplace colour schemes, to name a few. Workplace design is not a perfect science, and the process to plan a new office building can take years and millions of dollars in design and consulting fees. New office plans typically look to quantify the behaviours firms want to encourage in their staff and team, building out one floor of an existing office as a test, and confirming or disproving its hypothesis that the design will prompt those behaviours.

Organisations in Australia and Japan were found to have the greatest investment in workplace design globally. The WFH/office trade-off will be influenced by the level at which these factors of productivity gains can be replicated in a home office environment.

Collaboration and creating a buzz

Over recent years, organisational analytics software has been used to better understand how teams interact. A study conducted by Humanyze revealed that people on the same team were six times as likely to interact if they were on the same floor in a building, and people on different teams were nine times as likely to interact if they were on the same floor. While undeniably cost-effective, remote work tends to significantly inhibit collaboration, even over digital channels. Thoughts can occur anywhere and in any environment, but offices generally bring out the best innovating and ideating. The energy and buzz that comes from being in the same physical space is hard to replicate virtually.

Other benefits of working in an office include team-building, bonding, relationships, talent mentoring, corporate culture building, efficiency, management oversight and creative collaboration—all things that contribute to the entities' corporate culture.

We believe many businesses will consider these aspects as well as allowing employees to WFH. Leaders understand workplace culture isn’t about individual performances, personalities or attitude. It’s about how the team works together as a cohesive unit, and this is hard to create remotely, especially when building a new business, going through a period of growth or dealing with complex events.


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Business clusters

There is a close and complex relationship between a city’s built environment, geography and economy, and quantifying the benefits of industry clustering was first noted as far back as 1890.

The concept of ‘knowledge spill over’ is well recognised as workers and business are likely to learn from one another when in close proximity. Business clusters, for example Silicon Valley, have traditionally played an important role in forging and shaping these networks, by encouraging the sharing of knowledge, generating social capital and, in turn, driving regional growth. An important WFH consideration here is how digital networks can replicate these relationships or contributing events like an ‘accidental encounter’. There will be a continued need for industry-wide networking and collaboration opportunities.

What to expect

1. Greater workplace location flexibility

Some firms will continue to expand their WFH capabilities, with workplace cultures and technology potentially providing further flexibility. When COVID-19 occupancy restrictions are fully eased, we anticipate that certain firms could move to arrangements such as a one-day-from-home strategy. However, we expect this to be an extension of the office workspace rather than a direct substitution of location.

Importantly, these solutions may not have a direct impact on office footprints. Many flexible work strategies were traditionally implemented through ‘hot-desking’ solutions, with buffer workstations required to deal with spikes in demand. Strategies had to account for ‘peak’ demand periods. During certain occasions, employees would come into work to find no free desks available, while others would spend valuable time searching for a free workstation. This was inherently more complex in larger organisations, where establishing exact workstation requirements was more challenging. The lagged and disconnected nature of exact headcounts, particularly for firms with a higher prevalence of consultants, casual labour and diverged business units, pose greater challenges.

2. Flight to quality

The new environment will likely drive polarisation across the office market, with a reduction in office demand for lower-grade and peripheral office assets. Given the absence of a broadly available vaccine, leasing conditions in the near-term will be more challenging for lower-quality office buildings, and assets with smaller floorplates, poorer ventilation systems, shared facilities and less appealing amenities.

This compounds the typical divergence that occurs during an economic downturn as higher quality office assets typically benefit from having better quality tenants, longer leases that extend through periods of volatility, and locations that attract staff and profitable business clusters.

Moving forward

Given the long-term nature of office leases at Charter Hall, any potential impacts to office demand arising in the short term will be somewhat muted, with long-term impacts managed in advance. Over 70% of Charter Hall's Direct Office Fund (DOF) and Direct PFA Fund lease expiries are longer than seven years.

We believe that WFH will complement the traditional office set-up, with issues such as productivity, risk management and the creation and progression of company culture all being key reasons why the office environment will continue to be an integral piece of business infrastructure over the long term.

 

Steve Bennett is CEO of Charter Hall's Direct Property business. Charter Hall is a sponsor of Firstlinks. This article is for general information purposes only and does not consider the circumstances of any person, and investors should take professional investment advice before acting.

For more articles and papers from Charter Hall, please click here.

 

10 Comments
stefy
August 07, 2020

Perhaps not quite on topic, but IMO I am very skeptical that WFH is as productive as being there at the office.

Warren Bird
August 07, 2020

Well, all I can say is that our experience is that service delivery to our investors hasn't diminished at all, and our investment, lending and finance teams are doing their jobs as normal, while working from home. True, some things are taking longer to get done (document processing mainly), but that's been more than made up for by other efficiencies and the fact that at least some commuting time is now allocated to being online working and there's not the usual downtime involved in walking across the city to attend meetings with external parties.

So, as the CEO of a business, I don't share your scepticism stefy and wonder whether you have hard evidence like I do, perhaps drawn from a team with a different culture than the one mine displays. My team are champions.

stefy
August 08, 2020

I am long retired. My experience was as a federal public servant in IT applications development where interaction with my team was frequent and paramount.
I am genuinely happy that your experience has been so good.

Warren Bird
August 10, 2020

Thanks stefy, so no hard evidence from current experience. IT has changed a lot in recent years and the capacity to work from home in collaboration with your colleagues, via Zoom, Teams etc has made a world of difference.

David
August 10, 2020

There will inevitably be a very small minority of reprobates who want to take advantage of their new found "freedom" but these do not represent the norm.

Some roles by their nature can only be performed between inflexible time frames but others offer a perfect opportunity for staff to juggle periods of time over their waking hours to ensure they can manage both their domestic and workplace obligations - particularly when also forced to conduct home schooling sessions. This may mean they spend several hours of a night or on weekends performing tasks which are not time-critical such as responding to emails, planning for upcoming activities etc.

In cases like these, staff can devote some time to domestic matters during the course of their conventional working day and then utilise part of their customary down time to make up the time lost. The flexibility this opportunity provides enables staff to arrange their day to have all their responsibilities addressed at the most convenient time for their individual needs. This avoids the stress associated with having conflicting obligations during working hours and actually generates enthusiasm for them to complete work related tasks later or even earlier than would have been required in a structured workplace environment.

Never underestimate the gratitude your staff have for being empowered by the freedom to work flexibly. You may well be surprised to learn that you are receiving more hours than you are paying for and that even if you are getting less, the quality of the work produced would not actually make this discernible because staff are fully focussed on the task at hand.

Warren Bird
August 06, 2020

Good article Steve.
I read this both as an investor (UFS has direct and indirect office holdings in our portfolio, and I have personal property fund holdings, including with Charter Hall). It's helpful to read the thoughts of others as they consider the management of the property portfolio.
But also as the CEO of a business that occupies office space in the city, considering what all this means for our future occupancy. I can confirm that our thoughts at present are that we'll need almost as much, if not the same amount of, space going forward, but it will be configured differently. This could well include having a couple of smaller locations in different parts of greater Sydney, and a bit less space in the main CBD.
Still a lot to work out, but we have time to think about it as the COVID situation isn't going away in a hurry (thanks to those Citizens of Victoria Ignoring Directions). For now the priority is how to keep a team of 30 or so effectively working remotely, but coming in from time to time in small groups to keep up the personal relationship aspect of being a team member. We were ready to do a bit more of the latter when the latest increase in cases led us to pull-back. Most of my team are also still wary of catching public transport into the city.

One additional comment, on George's remark. At the end of the day, it will be a dialogue between the individual's preferences and the needs of the team as a whole that will determine how much people work at home and how much they come into the office. It is, however, certain that there'll be a lot of folk who think like he does and all of us employers will have to take that into account if we want to be an 'employer of choice'.

Think
August 06, 2020

Something that may take some time to take effect is OHS. WFH is not a one way street for cost saving where there is little sign of supporting WFH beyond the technology. How long until inappropriate desk / chair set ups start causing claims?

David
August 06, 2020

Astute businesses did not approve a WFH opportunity unless each individual conducted a thorough OHS appraisal of their working environment at home which included any potential risks of trips and falls, lighting needs, ergonomics, ventilation, heating and cooling, cabling safety, screen size / angles etc. The obligation to provide a safe working environment applies equally in a WFH environment as it does in a traditional workplace.

Warren Bird
August 07, 2020

Yes, David, we certainly did that.
I suspect that there's a difference in attitude between those businesses who took the view that this would all be over within a couple of months and those who took the view that it could be a lot longer. The former group would have done relatively little WHS testing, while the latter would have taken it more seriously.

When we told our staff in March that we'd be moving to work remotely, the official announcement was that we'd be reviewing at the end of May. My unofficial advice to staff was that the earliest i could see a return to the office was October, and probably not until 2021.

Now, of course, most people really like WFH and at least want the flexibility to do a fair bit of that even when we are able to be back in situ in the office.

So, the imperative for WHS has changed from 'do enough to get by for a couple of months', to 'make sure you get it right for the long haul because, pandemic or no pandemic, working arrangements are changed forever now'.

George
August 06, 2020

Well, I love working from home and even when the pandemic is over, can't see myself going in for more than a couple of days a week to stay in closer contact.

 

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