What will the offices of the future look like? Is there a risk of a tenant exodus and downsizing with hybrid work being the ‘new normal’?

Since the beginning of the Covid pandemic, we have heard stories of companies that have decided to respond to this new situation. Just a few months after the first lockdown, some companies claimed they had adapted to the new work-from-home system and would never return to the office. Although this trend was primarily noticeable among large multinational corporations, their internal policies were also implemented by their local branches in each country. Many other companies followed this or a very similar approach. 

The pandemic restrictions have been successfully over for more than a year now, but the theme of the ‘new normal’ continues to resonate in the office community. New hybrid models of work and their impact on the workplace are being addressed not only by landlords and tenants themselves, but also indirectly by investors, architects, construction companies or furniture manufacturers.

The questions of what the offices of the future will look like, what impact a possible reduction in the number of permanent jobs will have on their use, size and structure, and whether companies will reduce their leased space are still relevant.

Is office space cost cutting worth it?

With the new hybrid models and the shift of employees to remote work, the topic of economic savings from the reducing the number of workplaces and thus potentially downsizing office space has become more relevant. Let’s look at the matter from different perspectives, through the eyes of economists who think in numbers, as well as HR professionals considering company culture and employee well-being. The final opinion can be made by everyone individually. 

On average, the cost of running an office makes up about 5-10 percent of a company’s total costs. If a company manages to negotiate a reduction in the leased space and thus save, for example, a third of the rental costs, it translates to a maximum of a 3% saving in the company’s overall expenses. Is this financial saving really that significant and effective for the company in the long term?

Remote work and cutting back on office jobs can certainly have a financial effect. However, no one can say today what these new hybrid work models and the resulting lack of social contact will do to corporate culture in the longer term, say five or ten years from now. From an HR perspective, maintaining the company atmosphere and living the company’s shared values is important for the company’s prosperity and maintaining employee loyalty. And this is difficult to achieve solely through virtual contact. What if companies realize over time that this model is not working, and the company’s performance is deteriorating? Today’s situation shows that convincing employees to return to the office can be difficult. So, the question remains: Do companies genuinely want to save on what makes a company a company?

Evaluating work productivity:

Another aspect that is crutial to consider when discussing the future of offices, which was partially mentioned earlier, is employee productivity in a work-from-home setting. During the pandemic, we have heard that productivity of people working from home has remained high or even increased. This was attributed to the positive economic result of the previous year. I am sure you will agree with me that this indicator measured over a short period of time is not adequate and only developments over a longer period of time can give a more complex view. We need to wait for hard data and evaluation of longer-term trends in corporate indicators.

Most companies are adapting some form of hybrid working model, where employees are allowed to work out of the office for varying numbers of days. The most common models are 2+3 or 3+2, but 1+4 (days in the office vs. remote work) are not uncommon. Productivity, however, offers only one perspective. Another aspect is the impact of social isolation on us as social creatures. If we are trying to measure labour productivity, can we also measure employee ‘engagement’ or ‘happiness’ alongside it? And is productivity measured over several months truly more important than, for example, the creativity of a team sitting together in a room?

The impact of an overheated labour market

You will have noticed that the above mentioned parameters, such as negligible economic savings or hard-to-measure employee productivity, have their limits. We are increasingly hearing from companies that they would like to see their employees in the office more often. But employees don’t want to come back. The flexibility to work from anywhere is thus reflected in recruitment and is becoming one of the key parameters when choosing a future employer. White-collar unemployment in large cities is zero or even negative and companies are therefore rightly concerned that employees will leave for competitors if this benefit is reduced. However, the notion that employees will leave en masse if this benefit is cut is probably illusory… Yet it is reasonable to assume that if there were a double-digit unemployment, the employer’s position would have been different than it is today when companies require their employees to return to the office. Here again, one wonders whether it is possible to break out of the vicious circle without waiting for a change in the labour market, which would logically be the outcome of a wider economic crisis.

Will the new working models affect the size of the rented area?

What effect will the ‘new normal’ have on leased office space in the coming months and years? We know that in the past, roughly 60-70 percent of office space was permanent workspace. Of the current requirements, we are seeing a demand for expansion of common areas such as meeting rooms, kitchenettes, breakout, and dining areas at the expense of permanent workstations. The future ratio may be completely reverse. However, the technical part of such a change is costly and time consuming and so it is often done on the anniversary of leases when new terms are being negotiated and there is a chance of getting financial support from tenats. A number of leases are still ongoing and it can therefore be assumed that changes will affect many more companies in the future.  

The only relevant parameter from which an increase or decrease in leased office space can be objectively read is the net absorption figures monitored by the Prague Research Forum*. 

This market indicator expresses the difference in total leased office space compared to the previous period. If the result is a positive number, the amount of leased space has increased over the period under review and vice versa. The net absorption of office space is monitored on a regular basis, therefore a certain trend can be traced from the time series.

Development of the market indicator ´net absorption ´ for office space in Prague:

Source: iO Partners / Prague Research Forum

The data in the table clearly shows that over the last 5 years, including the covid ones, this indicator is positive. Despite the fact that the amount of the market indicator decreased during the covid years, it was still positive, so the total leased area increased every year compared to the previous year. Once the pandemic has subsided and all restrictions have been lifted, the figures are back on a clear and more pronounced upward trend. Over the last five years, leased space has been increasing, so the hard data confirms that companies are growing, they are not abandoning office space, on the contrary, demand is high. However, the question remains about the future development.

Conclusion

Although it is still too early to assess post-pandemic trends, all indications are that offices are unlikely to be the same as they were before the pandemic. As work styles change, so does the demandy of what an office should look like. But the data confirms that changes in these demands are not yet leading to a reduction in leased space. The *Prague Research Forum is a voluntary, non-binding organization that was created to better cooperate in researching the Prague office market. Its members are CBRE, Colliers, Cushman & Wakefield, iO Partners, Knight Frank and Savills, who share basic information on the Prague office market in order to provide the most complete, accurate and transparent data on its development.

WOOD Real Estate covers the real estate activities of the prominent Central European financial and investment group WOOD & Company, founded in 1991.

WOOD & Company manages investment assets worth EUR 4.5 billion, trades on exchanges with a turnover of approximately EUR 30 billion and provides advisory services on the most significant M&A transactions in the region.

WOOD Real Estate is engaged in building a high-quality real estate portfolio and active management of its commercial properties. The portfolio currently comprises over 355,000 sq m of leasable area.

In addition to its activities in the Czech Republic, where it manages the administrative buildings Hadovka Office Park, Green Point, Greenline as well as shopping centers Galerie Harfa and Centrum Krakov, WOOD Real Estate is also successfully building its portfolio in Slovakia and Poland. Slovakian real estate includes the Aupark Tower, Lakeside Park, BBC5, Westend Tower, BBC1, BBC1 Plus and the Bratislava shopping center Aupark. In Poland, it manages the Astrum Business Park office building.

Media Contacts:

Martin Kodýdek
Head of Marketing | CZ/SK
Tel.: +420 606 615 311
e-mail: martin.kodydek@wood.cz