What do we really want from Real Estate?

On June 3, 2021, Bloomberg reported that Apple CEO, Tim Cook, sent an email informing employees that they should expect to be back in the office at least three days a week by September. This is similar to Google’s plan to have most employees back in the office three days a week, and expects 20% of their employees to continue working remotely on a permanent basis.

These changes in working arrangements indicate there is value in having teams together in-person, at least part of the time, for collaborative work. The insurance sector has a key role to play, not only in protecting interests, but also in facilitating this shift in working arrangements by providing risk consulting expertise.

The New Office: A More Collaborative, More Creative Space

Far from signaling the demise of the office, a greater acceptance of working from home and new hybrid work strategies will make the office even more relevant as a place for creativity, innovation, teamwork, social interaction, and nurturing corporate culture. 

Office space is changing to become more collaborative, with more meeting rooms, breakout areas and project space, and with fewer rows of workstations. Buildings are also adapting to provide more services for tenants and their employees with more mixed-use projects, such as Thailand’s The Parq and Singapore’s Marina One. Moreover, there is also a realisation among owners and occupiers that strong sustainability and wellness credentials are critical building attributes.  

However, both owners and occupiers need to ensure that their space encourages employees to work in the office. In CBRE’s recent Workforce Sentiment Survey, about 70% of the respondents prefer to work with a hybrid remote-and-office arrangement with a majority citing community, connection, and collaboration as the main reasons drawing them back to the office environment.

Hence, offices will play a greater role in talent attraction and retention through their wellbeing and collaborative offerings. Locational decision-making is already developing to include more stakeholders within organizations, ensuring employee health and wellbeing are adequately considered as it drives significant gains in performance and engagement. An article by Gallup, featuring their workplace research experts, shared that companies with a focus on employee health and wellbeing have increased productivity by 31%, lowered healthcare costs by 41%, and decreased turnover among thriving employees by 35%.

Successful companies already give this a high priority through a holistic approach to employee benefits to build and protect their employees’ physical, emotional and financial wellbeing. Real Estate locational decisions that look beyond the headline financial metrics and incorporate employee engagement and wellbeing are an integral part of this holistic approach and drive productivity gains.  

Shifts and Rebalances in Real Estate dynamics

Despite people choosing to spend at least part of the week working from home, occupier Real Estate budgets may not shrink as some would expect.

While the quantum of space required could theoretically diminish by having fewer people in the office, this is balanced by the need for lower density. Office fit-outs may also become more expensive to allow for greater flexibility.

Savings, however, can be made as the desire for centrally located space becomes less critical compared to the need for higher quality, more modern spaces in decentralized locations. In Hong Kong, for example, good quality, modern decentralized office spaces can be found for 25% of the cost of space in core CBD areas. 

Strong sustainability credentials have long been a pre-requisite for many occupiers when considering office space, and buildings deemed non-compliant are not considered. Wellness requirements are increasingly becoming more commonplace. There is now greater awareness, not only around what motivates top talent when choosing employers, but also the productivity gains offered by improved physical and mental wellbeing.

Flight to Quality

As occupier demand evolves, vacancy in older buildings will rise and major upgrades, or redevelopment, will be required if they are to compete. Relocating, however, is an expensive process, requiring considerable capital expenditure.

Although a property owner may offer incentives to mitigate the capital outlay, this would require additional guarantees from the tenant in the form of a higher lease deposit or for the landlord to assume additional risks. Insurance capital can bridge this and other gaps between a tenant’s capital constraints and an owner’s risk considerations through the application of bond structures.

By adopting a more innovative approach, owners, occupiers, and insurers can facilitate the “flight to quality” and strengthen the role of the office in the corporate world.

Conclusion

The value of an office building lies in its ability to attract corporate demand, which itself is influenced by its employees’ needs. The challenge now is to understand and deliver upon these needs. By adopting a fresh approach, risk management practices can be utilized to assist the transition to a new hybrid working model.

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Edward Farrelly

Senior Vice President, Asia Real Estate Industry Lead

Disclaimer: Marsh India Insurance Brokers Pvt Ltd is a subsidiary of Marsh McLennan.

Marsh India Insurance Brokers Pvt. Ltd. having corporate and the registered office at 1201-02, Tower 2, One World Center, Plot-841, Jupiter Textile Compound Mills, Senapati Bapat Marg, Elphinstone Road (W), Mumbai 400 013 is registered as a composite broker with Insurance and Regulatory Development Authority of India (IRDAI). Its license no. is 120 and is valid from 03/03/2021 to 02/03/2024. CIN: U66010MH2002PTC138276.