THE PAST
The Romans gave us the word ‘office’ from the Latin officium and were early adopters of working-from-home (WFH) in rooms called tablinum.
The first purpose-built office buildings arrived in the 18th Century in London and phrases like ‘office furniture’ and ‘office hours’ have been around for over 150 years. The invention of things like steel frame construction, lifts and electrical installations enabled office buildings to get bigger and more open leading to the first skyscraper in 1885 and the first open plan office layout in 1906, both in the U.S.A.
Since then, office layouts have been fluctuating between organic, user-friendly styles such as Bürolandschaft, and dehumanizing, grid-based cubicle farms.
Today, despite all those years of evolution, our reaction to a pandemic has driven us into terra incognita and wondering where we go from here.
THE PRESENT
Data for Warsaw, Poland, from the last 10 years, shows that the total stock of modern office space has grown steadily by roughly 1 million m2 every four years: 2012 = 3.8 million m2, 2016 = 5 million m2, 2020 = 5.9 million m2. At that pace, we should reach around 7 million m2 at the end of 2024. The questions are, will we, and should we?
Will we? We had a good start. 2021 supplied 325,000 m2 of new stock, higher than 2020 and in the last ten years beaten only by 2016. However, the pandemic slowed things down and the development pipeline is the lowest we have seen since 2009, indicating a potential undersupply reaching into 2025. Recently though, things have picked up and there are several very interesting developments scheduled for completion in 2024. Whether this will be enough to reach 7 million m2 by the end of 2024 remains to be seen.
Should we? The popular (but risky) mantra of “If you build it, they will come” has worked well for speculative office development in Warsaw so far. We build, new businesses arrive, existing businesses expand, all is good. There are other good indicators too; although vacancy levels are up to 12.7%, that’s not as bad as 2014 (13.3%) or 2016 (14.1%). Leasing activity (gross take-up) in Q3 2021 was close to pre-pandemic levels and new office projects completed in 2021 are overall 94% leased. So where is the pandemic effect? To see that we must look more closely at actual occupation – people sitting at desks in offices.
Looking at the total office stock minus the total vacant space, we see between 2012 and 2020 an average annual increase of leased (and presumed occupied) space of 227,500 m2. In 2021 however, this figure was only 43,400 m2. Additionally, 2021 had record levels of space made available for sub-lease. This does not count as vacant space because it has a tenant, but that tenant is not using it so has made it available for sub-leasing to someone else. The total space available for sub-lease space is now around 100,000 m2 (85,000 m2 higher than normal). So, if you deduct the excess sub-lease space from the small increase in occupied space in 2021 you get a net decrease in occupied space of 41,600 m2 compared to an average increase of 227,500 m2 in previous years – a swing of nearly 270,000 m2.
The main driver of this swing was 778,400 m2 of vacant space, nearly 200,000 m2 more than 2020. It tells a story but is still within historically acceptable boundaries, and is a perfectly normal part of the office market that will ebb and flow over time. In isolation, nothing to worry about.
The most obvious effect of the pandemic though, is the low occupation level of regular office space leased by companies across the city (and not available for sub-lease). Restrictions have eased significantly but we have not yet returned to pre-pandemic levels of office use. This varies from one company to another but let’s assume on average that every office has 30% unoccupied space right now. That’s around 1.5 million m2 in limbo in Warsaw. Will employees return and use the space, will the office layout be changed to use it differently, will the business grow into the space, or will it ultimately come onto the market as sub-lease or vacant space?
THE FUTURE
Predicting the future is hard, especially during a once-in-a-lifetime event.
From various studies we think we know a few things:
• Employees have embraced a flexible approach to working between home and office and, to varying degrees, want to continue doing it, with or ideally without, a pandemic.
• Productivity did not fall off a cliff and tasks were mostly completed as well as they were before the pandemic.
• It is and will probably continue to be difficult, for employers to encourage staff to return to the pre-pandemic, eight hours a day, five days a week, office-based routine.
The list of things we don’t know is longer but there is no shortage of people trying to find the answers. Here are a few of my key questions:
On WFH:
• We need much more honest detail about why people are reluctant to return to the office and what they like about WFH.
• Is their concern about a return to any office-like environment or just to their current office?
• If their office environment was improved, would more people return, or does it not matter because they simply don’t want to leave home?
• Will people happy to WFH today always be happy to do so, even if circumstances change? This could be a change in personal circumstances, in home environment or a change in legislation. Higher taxes for the ‘benefit’ of WFH and lower salaries for voluntarily moving your workplace outside the city have both been in the news.
• If those happy to WFH today need to return to the office a few years down the road, are they entitled to demand office space? What if that space has already been disposed of?
• It is an employee’s market right now and so demands can be made. What happens when (if) employers have more candidates to choose from?
• Are we building a new layer of inequality – those who can WFH versus those who cannot? If we are, what might be the consequences of that?
• For those WFH long term, how do we protect them against a deterioration of mental health and wellbeing (already an issue) or from slipping into bad or dangerous habits? How do we prevent a weakening of social skills and the loss of a sense of identity or belonging? How do we deliver mentoring, training, encouragement, support? How do we make them feel part of a team? Do they want to feel part of a team?
On the knock-on effects if WFH becomes the status quo for large numbers of people:
• Will this lead to a complete overhaul of the way we employ and work? Tasks achieved versus hours worked. Need to change employment terms and conditions. Shorter working hours or even a four-day week?
• A safe and healthy working environment is highly regulated and generally guaranteed in modern offices but who will ultimately be responsible for making sure all these home offices are equally good? Who is responsible if employees develop health problems from an inadequate home office environment?
• Will it affect the residential market, with people moving out of town into properties better suited for WFH? Who moves into the town centre places they leave behind?
• If office occupation drops longer term, what is the knock-on effect on the services and retail that currently exists to serve a concentration of office workers?
On what this might this mean for offices:
• What kind of an office environment would encourage people to return? How practical is it to create that environment?
• Satellite offices – would people use smaller ‘community office’ spaces closer to home? If so, where would these be located and what comes first – developers building them or employees demanding them?
• How long do companies wait before making long-term decisions about their office needs? So far, they have mostly opted to renew leases or sub-let unwanted space, but eventually they will need to make bigger decisions, which is better done if they understand the future intentions of their employees.
• What role do short-term serviced offices play in all this?
• Will people returning to the office require more space than before to feel comfortable? Will a reversal of densification offset, possibly completely, the loss in demand caused by WFH?
Only when we have answers to all these questions, can we better predict the future of office space. Until then, indications are that other factors such as economic growth and office-using penetration will outweigh the structural impact of WFH trends and that the office sector, while it might look very different from today, will continue to grow and prosper.