Office politics

Commercial property pundits evaluate observable trends in the new hybrid work paradigm and the future of the sector’s sustainability pursuits.

With the worst of the health crisis caused by COVID-19 seemingly in the past, workspace ratios are in flux. Hybrid work patterns appear here to stay — daily occupancy rates in office buildings globally have dropped from 80 per cent before the pandemic to a current range of 20–70 per cent.

In Australia, occupancy rates are highest in Brisbane at 70 per cent, followed by Sydney at 55 per cent. They are lowest in Melbourne at 35 per cent, which may partly be due to the state government continuing to encourage staff to work from home, as well as the lasting psychological effects of imposing the world’s longest COVID-19 lockdown (262 consecutive days).

However, predicting what will happen next is a fool’s game, according to Sameer Chopra, head of research Pacific and ESG Asia Pacific at global commercial real estate services and investment company CBRE.

“One of the big things I say to people is not to make any hasty decisions,” says Chopra. “Be mindful that the situation is still evolving rapidly — as are people’s expectations. For example, a few months ago, everyone wanted a “zoom room”. Today, there’s almost no demand for it. Instead, everyone wants big meeting rooms and collaboration spaces. It’s not quite 2019, but it’s pretty close to it.”

Others take a gloomier view of the outlook for the commercial property market. “As leases come up for renewal, companies are often opting for smaller offices, saddling landlords with millions of square feet in vacant space,” reported Peter Eavis in The New York Times in November 2022.

Responding to the new landscape

Whether landlords are saddled with excessive vacant space will depend on how successfully they respond to hybrid working needs and growing demands for sustainability, says Nigel Virgo, national sector leader for real estate and private equity at KPMG Australia.

“With employers encouraging their teams back into the office and a rapid growth in employment over the past two years, we are still seeing a demand for space,” he says. “The outcome of lease renewals will be a function of how tenants and landlords are able to re-utilise space. We will likely see less of a need for satellite offices in the new paradigm of our hybrid way of working, particularly with the continued utilisation of work from home.”

Some Australian companies, such as software giant Atlassian, have adopted a “work from anywhere policy” in which staff are never required to work from an office. Others are allowing a portion of the year to be spent at work in another time zone.

Nonetheless, 72 per cent of corporate decision- makers believe that the office will remain central to their organisation’s ecosystems in the long term, according to the global property consultancy JLL’s Future of Work Survey 2022.

An observable trend is for employees to work from home on Mondays and Fridays, which results in vacancies being highest on the days adjacent to the weekend, says Virgo. Companies are creating both formal and informal policies about when staff are required to be in the office and are using a variety of incentives to tempt workers back into the office voluntarily. In a tight labour market, employee expectations around flexibility are taken seriously — and directors would be advised to keep their fingers on the pulse.

“While directors obviously have a huge responsibility in supervising office occupancy, often it will be delegated to people further down the ranks, such as project managers who report back to them,” says Paul Healy, CEO of the Property Funds Association of Australia. “While directors are not driving the actual implementation of office occupancy, they are certainly aware of their responsibility, and no doubt rely heavily on the information coming back to them. They need to be asking the right questions.”

Perks aplenty

Many organisations are using carrots rather than sticks to encourage teams to spend more time in the office. For example, CBRE provides free coffee from a local cafe on a Monday and Friday, along with a free breakfast every Wednesday at its George Street office in central Sydney.

“As a director, there is a much greater need to be aware of everyone’s life circumstances and to be more accommodating,” says Helen Tarrant, a commercial property specialist and the author of Cashed up with Commercial Property. “Whereas previously, if you worked in a law firm or an accounting firm, and you wanted to make partner, you had to do your 12- or 14-hour days from the office. That’s simply how it was.”

Standards for offices have also been elevated — there is an assumption that making the effort to travel into work must be worthwhile — and the environment conducive to impactful work.

“The biggest trend that we have noticed in the past 18 months is the trend around premiumisation,” says Chopra. “People want beautiful workspaces. Wellness is important. They want abundant natural light. We are seeing companies respond to that — it is the middle of the market that is sagging.”

Premium and A-grade office space, which offers more for employees, is in higher demand. According to CBRE, two thirds of organisations that relocated offices in the past two years are paying more rent than if they had stayed where they were.

Chopra adds that while a lot of generalisations are being made by pundits about work patterns, directors need to make decisions based on the specific circumstances of their organisation and industry. “What do your clients want? What does the organisation want? What do individuals want? At the end of the day, you cannot dismiss your clients,” he says. “I am in a customer-facing role and all my clients want to meet me for coffee. They want to eyeball me and see whether I am serious about whatever it is that we are discussing.”

Virgo believes that directors need to be mindful of how to maintain culture when operating under a hybrid model. He is seeing a shift in the configuration of workplaces to include more communal and collaboration areas, with focus work completed at home.

“For directors, thinking about how employees use office space is vital to improving space optimisation,” he says. “Landlords have their role to play in looking at fit-outs, with consideration of how spaces work for tenants, both to support business demand as well as considering their desire to manage rental costs.”

Geographic splits

Another trend is hyper-localised occupancy rates. Although visitation to Australian CBDs is increasing, vacancies are still comparatively lower in regional areas. Many workers fled tough lockdowns in cities for more space and freedom in the bush — and are able to remain thanks to flexible work policies.

Even within the same city, some precincts are more active than others. For example, in Sydney, Chopra believes the financial district around Martin Place is “very active”. As are areas where government agencies and large corporates have incentivised teams to return to the office. “It doesn’t mean that other places won’t get their previous buzz back,” he says. “It’s just that different things are moving at different cadences.”

Future-forward buildings

Climate change concerns will play an increasingly important role in the commercial real estate market as more properties are impacted by climate change risks.

“ESG is only going to become more prominent as governments and corporates have mandated often ambitious net zero and sustainability targets,” says Healy, adding that as building stock ages, it becomes more difficult to compete with the sustainability rankings of newer buildings — a fact that may be reflected in rental prices over time.

“ESG has become ingrained into the real estate market, with tenants and investors expecting clear climate policies and procedures, with assets assessed against various metrics and frameworks,” says Virgo. “Disclosure is ever- evolving and continues to become more extensive.”

The measurement and tracking of embodied carbon in buildings plays a significant part in understanding a building’s carbon footprint. For most organisations, it is a challenging process. Tech innovations, such as KPMG Origins, are emerging. The blockchain-based track-and- trace platform is used to measure upfront carbon and to meet the changing demands on real estate.

The National Australian Built Environment Ratings System (NABERS) is an Australian initiative to provide a rating out of six, similar to an energy efficiency rating commonly seen on appliances. It applies to commercial property and denotes greenhouse gas emissions, energy efficiency, water efficiency, waste efficiency and indoor environment quality. A building with a NABERS rating of six stars will have almost half the amount of greenhouse gas emissions. The initiative has been expanded to the United Kingdom and New Zealand.

“People are willing to pay a premium to be in a five- or six-star NABERS-rated building,” says Chopra. “One of the reasons for that is because about 10 per cent of the cost of running a building is energy costs. If you can get into an energy-efficient building, you end up with a lower cost. It is, of course, also the right thing to do from a climate change perspective.”

“Topical at the moment is the potential for climate change to create an environment where asset and fund managers are exposed to stranded assets,” says Virgo. “B- and C-grade assets may be at higher risk of being stranded due to climate-related funding conditions being imposed, such as minimum energy efficiency targets.”

Real estate investment trusts (REITs) have identified this as an opportunity, targeting B- and C-grade assets that are at risk of becoming stranded, with the objective of repurposing.

Virgo notes that stakeholders will expect sustainability claims to be rigorously tested. “Greenwashing risks are likely to amplify as groups grapple [with ways to measure emissions] and interventions relating to the mitigation of climate risk for commercial assets.”

A question of balance

Peeyush Gupta AM FAICD is a non-executive director of National Australia Bank and SBS, and chair of Charter Hall Long Wale REIT. He shares some advice for boards dealing with changing office space requirements.

1. Hybrid is here to stay

“The contemporary tussle seems to be between two or three days a week in the office. CEOs want their people back in offices at least three days a week. Staff are generally saying, ‘Surely, two days should be enough?’

We need to reimagine workplaces to make them a more inviting place where people actually wish to come, rather than be forced to come. Hybrid work is here to stay and needs to be managed sensitively and appropriately so the needs of both the staff and the organisation can be managed.”

2. Practical solutions

“Currently, a lot of landlords are looking for tenants, so you can probably upgrade for the same cost to a better building. Part of a more inviting workplace is ensuring your teams collaborate and agree on which days they will come in, so that they can be together as a team, building culture. Having flexible rules is important — but with some level of interaction, culture-building, mentoring and training. After all, if staff take the view they don’t need to come in at all, then why shouldn’t the CEO take the view of not needing Australian-based staff? There’s a balance here.

Humans are social creatures and part of us wants interaction with colleagues. It’s about working through the issues in a flexible, empathetic way to find the right solution for the teams — and then for the entire organisation.”

3. Green credentials

“If you have a serious policy, you need to give it effect. Otherwise, don’t bother having a policy. If you are going to have a sustainability policy that speaks to your green credentials, you need to follow through — but recognise that sometimes these issues are difficult in the sense that the data is not available. You’ll need to commit to collecting the data, cleansing it, curating it, monitoring it and going on the journey.”