It merely accelerated it, and likely sustained the long-term decline in the size of the office market relative to the entire property market of South Africa. But it may change some office design trends significantly. While “collaborative space” is a buzzword, I believe that “private space” in office buildings is what is sorely lacking.
The office property sector has been a regular underperformer in the commercial property sector in recent decades. Since 1995, MSCI data shows average office property total return of 11.3% per annum. By comparison, Retail and Industrial Property averaged 14.5% and 14.2% per annum respectively over that period.
Information and communications technological advancements had for decades been improving employee productivity in key office-bound sectors such as the “Finance, Real Estate and Business Services” Sector. As a result, the sector’s employee numbers weren’t growing as fast as its GDP (Gross Domestic Product) over the years, and it is employee numbers that drive the need for office space.
Furthermore, the shift to open plan offices, away from the old-fashioned closed offices that many employees had in earlier decades, enabled space saving, as employers could greatly increase the density of employee workspace. I believe that cost saving was probably more of a consideration in the move to open plan than were employee productivity considerations.
In addition, information and communication technological advances greatly reduced the amount of space required for document storage, while also increasing the mobility of employees. This led to a rise in the portion of the office work force that could work remotely full time or some of the time.
Old habits and “comfort zones” were arguably the only thing preventing far more people from fully embracing the technologies available for remote work and communication, in order to improve their daily productivity through, in many cases, being able to cut wasteful commuting time and financial costs.
Covid-19 lockdowns didn’t introduce the WFH trend, therefore, it merely sped it up.
Covid-19 lockdowns, therefore, did not introduce a new trend here. They merely sped a long-term trend up, causing more pressures for the already pressured Office Sector.
The lockdowns forced the late adopters to give remote work a try, and many found out just how much virtual business interactions could improve productivity by eliminating wasteful commuting, not only the daily commute to and from the office, but equally importantly those frequent time-consuming trips for many of us to meetings somewhere across the city.
In addition, for those of us who had wanted to use greater remote interaction long before Covid-19, the lockdown period made it acceptable practice in many companies.
My expectation was therefore that, following the easing and ultimately the end, of lockdowns, many employees would resume the commute to the office, but that the level of office attendance would not go back to the levels of 2019 pre-Covid 19 days. Then, from the new post-lockdown “normal” level, the gradual long-term trend towards greater levels of remote work would resume, on the assumption that the enabling technologies will continue their long-term improvements.
This appears to be what is transpiring. Lockdowns are a thing of the past (hopefully), offices are fully opened up, but office attendance rates don’t appear to have reached levels that they were at prior to Covid-19. And I’m guessing that current office attendance levels are more-or-less where commuting levels will settle (the “new normal”).
The Office Market is correcting in 3 broad ways
The office market correction, in response to all these pressures on office demand, would then take place in various ways.
- Rental decline
Firstly, rentals would decline. This has been taking place to a significant degree. Rode rental data, estimating the average National A-Grade De-Centralised office Rental/Square Metre, has declined by -7.6% in actual terms on the 1st quarter 2020 level, and a very significant -16.4% in “real” terms when adjusted for GDP inflation.
- Decline in relative size of the office market
The 2nd part of the correction would be in a decline in pace of supply of new office space coming to the market along with reducing existing stock. This appears to be happening too. A portion of older existing office space is being repurposed into residential property, while StatsSA building stats point to very low levels of office space planning and completions of late.
For the 12 months to May 2022, square metreage of office space plans passed were -69.6% down on the 12 months to May 2019.
The office sector is likely to continue its long-term trend towards making up a smaller portion of the total property stock of South Africa.
For the 5 years to 1990, office space completed made up 34.4% of total non-residential buildings completed. By the 5 years to 2021 this had declined to 22.1%, and I would expect it to recede further.
- Building design set to change as landlords compete with the attractions home
“Collaborative space” is the buzzword, but it is “private space” that is lacking in many buildings
The 3rd manner in which the office market is likely to adjust is in terms of building design, and here things get more complex.
The market has to compete with the home in the case of those jobs that can be done from either place.
One key “selling point” to employees, regarding the benefits of the office, is “collaboration”. Employees need to see each other “in person” at least a portion of the time, so the story goes, and to be sure, Collaboration at least some of the time is important in many jobs.
Collaboration has thus become a buzzword, and with it the term “collaborative space”.
But perhaps a neglected part of the whole equation is the work part. Collaboration and employee interaction is necessary some of the time, but much of the time for many employees is about focusing on their work individually, preferably with no distraction.
Distraction and disruption for some employees working from home can be an issue. But what then of the open plan office? Noise and disruption are often abundant there too.
For many years, collaborative space has been in abundance in many office buildings, be it meeting rooms, coffee shops or “pause areas”. The design may need improving, but I have rarely seen a shortage of collaborative space.
What I have seen a shortage of is “private space”, space where people can work without distraction, a necessity in many jobs. There was a reason for old office buildings many years ago having offices that employees could go into and close the door.
That necessity for private space has suddenly skyrocketed due to the “zoomification” of many of our daily business interactions. Even for those back in their offices daily, many will interact with others remotely in order to save on wasteful travelling time and money. Open plan offices where colleagues in close proximity were talking on phones or to each other were disruptive enough for those nearby. Now the often confidential video conferences get added to the mix.
Enter the “telephone booth” office, the small soundproof cubicle for quiet work. The few that exist in the open plan office buildings appear very popular, and it would appear that far more of them are needed now.
So perhaps if there is one trend change coming out of all of this, it could be a partial shift back away from the open plan office, towards one with a significant increase in private space.
Collaborative space has been a buzzword in the Covid-19 period, but it has been private space that is arguably sorely lacking.
- Finally, what to do with a far longer weekly “off peak” office attendance period”?
Finally, a key issue for the office sector is what to do with a far longer “off peak attendance period”. There has been a visible change towards a far shorter weekly peak office attendance period. In days gone by, the peak attendance period was 5 weekdays. Now it is arguably 3 days (Tuesday, Wednesday and Thursday) at best, and even Thursday can be quieter. 4 out of 7 days at least have very low attendance rates in many office buildings.
I expect to see far more creative ways of utilizing that down time for other commercial activities, possibly by a different tenant altogether. Because right now it would appear a rather costly exercise by many corporates to hold office space that is un-utilized for the bigger part of the week.
