As companies continue to wrestle with how to create an efficient and productive workforce in a remote- and hybrid-workplace world, commercial real estate is suffering from a lack of use.
Office building occupancy rates among the 10 most populous US cities remain at 43.6%, well below pre-pandemic levels and notably lower than the national occupancy rate of about 67%, according to Kastle Systems, a managed security provider to more than 10,000 companies globally.
Many companies have closed under-used offices as a result of the shift to hybrid or remote-work environments, prompting commercial real estate owners to reconfigure space and add amenities for corporate employees when they are in-office. In some cases, that includes technology to support metaverse adoption for collaboration and other meetings.
(While the metaverse involves platforms that rely on wearable technology — headsets, AR/VR glasses, etc. — the most popular platforms, such as Decentraland and The Sandbox, can be accessed using a desktop computer or a smartphone.)
Other real estate owners and urban planners are taking a cue from Europe and building spoke-and-hub configurations where headquarters are at the center and smaller offices radiate out to accomodate a more dispersed workforce.
One European model that’s beginning to catch on among developers is the so-called “15-minute city,” where workplace, education, health, sports, shopping, and entertainment needs are accessible either bywalking or cycling within 15 minutes of employees’ homes.
Peter Miscovich, managing director of Jones Lang LaSalle IP (JLL), a global real estate investment and management firm, spoke with Computerworld about how the pandemic has reshaped commercial real estate and the purpose of the workplace. Miscovich, who co-authored the book, “The Workplace You Need Now: Shaping Spaces for the Future of Work,” is a former Accenture and PWC advisory partner, and has been involved in workplace transformation since the early 1990s.
The following are excerpts from that interview:
JLLPeter Miscovich, managing director of JLL.
What’s different today in the commercial real estate business compared to a year ago? “What’s fascinating is the hybrid world of work is evolving, changing, accelerating, and refreshing every 30 days. We used to develop a real estate workplace strategy, and that was good for three years or five years. But now it’s just this new landscape of evergreen refreshment that the pandemic started; then hybrid work and all the various opportunities and challenges have just continued. It makes my day-to-day and week-to-week work very interesting and exciting.”
What is the biggest trend you’re seeing in commercial real estate now? “From a real estate occupier’s perspective, as we go into the later half of 2022, the challenges around hybrid work and hybrid workplace integration and management are continuing to evolve. From an occupier perspective, I think what we’re seeing is many organizations are having some success, but still face continuing challenges in orchestrating their hybrid work environments. I think that experimentation cycle will continue through 2022 and probably into 2023.”
In Europe, many companies are taking a hub-and-spoke approach to office layout, with headquarters in a central location, and smaller offices to accommodate a more distributed workforce. Are you seeing that trend elsewhere? “During the early part of the pandemic, we saw that in the UK and other parts of Europe, and we thought that it would take hold here [in the US] as well. There was some experimentation here in New York, but it was limited. I think there’s a difference in lifestyle and home sizing in Europe, and we’re not seeing that hub-and-spoke strategy take hold in the US as we’ve seen elsewhere.
“Another great concept that started in Europe and is incubating here is the 15-minute city. This is where, whether you’re in London or Paris or other metropolitan areas of Europe, your live-work-entertain ecosystem is 15 minutes by walk or bike. I think that 15-minute urbanization concept is growing in Europe for ESG, climate change and sustainability requirements, and lifestyle choices. I think we’re starting to see some of that in places like Cambridge, Massachusetts. Some of that already exists in other places like New York City, San Francisco.
“The 15-minute city concept makes a lot of sense. …I saw that concept 15 years ago in the Netherlands, where workers preferred going to a nearby hub…. They could have coffee at the hub and it could be 10 minutes from their home.
“So, there’s a greater European cultural affinity to that hub-and-spoke model, which we’ve not seen here as much. I will give Europeans all the due credit for the 15-minute concept, which makes a whole lot of sense.
“You reduce energy consumption used in commuting; you have more dynamism in these 15-minute city environments. They’re more enjoyable, especially for this next generation of talent. Educating children, entertaining families, green space and parks and recreation…, all coming together in terms of the next revolution in urban design. There are some really interesting concepts. Even the new Google campus in San Jose and Microsoft in Atlanta are focused on some of these concepts.”
Have you seen more evidence of co-working — and what exactly does co-working mean? “In the early 2010s through perhaps 2019-time frame, the “WeWork” concept or alternative office concept took hold — being able to take a suite of offices for 30 days or six months or two years in some cases. Or, in other cases, to take a desk in a city for four hours for one day. That type of co-working and third-place real estate flexibility, we do see continuing. That’s still sorting itself out as we go through 2022 and into 2023.
“But in the next evolution of building owners that offer co-working spaces, the hotel and hospitality industry are also beginning to offer it along with other amenities. I think we’re going to see some interesting co-working real estate offerings.
“There are also several cities in the US that are trying to attract digital nomads with incentives. Residential buildings here in New York are offering [living] space along with office space. So, it’s an interesting mix. It’s a convergence of co-working, amenities, entertainment facilities all coming together, whether in a developed site or a communal area of a city.
“Another area worth watching is the metaverse — the ability to collaborate and be in virtual real estate. We’ve been quite surprised that extended reality and virtual reality would play a role in retail, hospitality, entertainment, and collaboration [and] that the metaverse will play a role in the future. That metaverse adoption rate has accelerated far beyond what any of us could have predicted.”
In what way is the so-called metaverse being embraced? “I think we’re starting to see the younger generation, who are already gamified, be very comfortable with [the metaverse] in the workplace in terms of collaboration and training. Metaverse immersive training is 100% to 200% more effective than classroom training, for example. And, so these immersive environments are beginning to scale. The ability to have metaverse engagement outside of a headset is also growing. And, I think again the retail, hospitality and entertainment sectors have really led the way, and the corporate sector is now following in terms of metaverse adoption.
“It’s not like we’re all going to go to the metaverse and leave the physical world, but the metaverse becomes yet another option in terms of workplace engagement, collaboration, and experience. And so that digital/physical blur continues to grow.
“Apple Glass will come out in 2023. Augmented reality, mixed reality, extended reality and metaverse engagement may become much more a part of our day-to-day experience in the next two to three years.”
Jones Lang LaSalle IP, Inc.What are some of the other dynamics that are affecting the commercial real estate market? “It’s interesting, the pandemic is still with us. We still have 400 to 500 deaths a day in the US. So, there is some concern around the continuing pandemic, but not the same level of concern as there was in 2020 or 2021.
“But certainly, the issues of risk, managing good health, and safety and wellness protocols in the workplace [remain]….
“In the fall of 2022, I think some companies are hoping to see a stabilization and a return to normal. But I don’t think we’re seeing it…. So, that management of talent demand for hybrid work flexibility against supply, I think we’re going to see continued optimization, harmonization, and organizations trying to figure out how to make this new hybrid workplace ecosystem work effectively. How do we operationalize it? How do we make it human centric while at the same time meeting business performance needs?”
No matter how you slice it, there simply aren’t as many workers spending as much time in offices as they did before the pandemic. What do owners and leasers do with all that unused space? “I think we’re seeing different strategies and scenarios. We advise clients to take a surgical approach to look at various workforce cohorts and organizational business strategies. Where is your talent today and where is your talent in the future? And then consider what locations and sizing of envelope will support those business and workforce scenarios – both present and future.
“In taking the surgical and more thoughtful approach, it’s not so simple to say in one fell swoop we’re going to transform our portfolio in the next six months.
“We’ve seen the stories of Yelp and others who can make those decisions [to close offices]; if you have five sites, maybe you can make those decisions. But if you have 500 or 5,000 sites and you have multiple large campus locations, it requires a much more thoughtful, surgical approach in looking at the optimization of your real estate envelope. And, to ensure that the real estate you have remaining will not only be optimized but provide that peak experience you want for that human centric approach.
“That requires careful analysis and scenario development and then looking at optionality and timing and workforce trends, location trends, portfolio optimization all in concert with hybrid workplace integration.
“The challenge we’re also seeing for some of our large clients is that they’ll have peak in-office workdays on Tuesday, Wednesday, and Thursday. So, if you’re having very high peak occupancy on those days, it’s not easy to just optimize that entire site because you have a lower occupancy on Monday and Friday. Can you scale services and amenities with that fluctuation?”
How have office occupancy rates changed over the past year or so? “The trend has been upward, but not to the degree many folks anticipated — especially in large urban centers. But in many suburban locations and second-tier and third-tier cities, I think we’re seeing occupancy at relatively high levels compared to what they were.
“So, again it’s not a one-size fits all approach in terms of urban and suburban locations. It matters where you have your real estate within those locations. What are commute patterns? In major cities such as New York and San Francisco, there’s still hesitancy for transit and where there’s long commute times we’re seeing lower occupancy rates.
“In geographies where there are a lot of automobile transit, we’re seeing higher levels of occupancy. I think those trends will continue, but the question is: is it an upward gradual trend that continues through 2022 and into 2023. Or are we reaching this new normal? We’re watching that closely with our clients.
“I will say many of our CEO and CFO and CHRO and executive leadership teams have come to accept the data of the last 18 months to two years that hybrid workplaces are here to stay and they’re looking to adapt those behaviors and this new modulated occupancy threshold to be less than what they were in 2019. It’s a new normal everyone is coming to terms with.”
How are businesses dealing with a vastly smaller in-office staff? Are they sub-leasing space? “I think there are two camps we’re seeing — especially in the tech sector – for companies like Yelp and others, to move to a more remote-centric strategy given the nature of business, their talent, the infrastructure they have and, in some cases, their scale.
“Scale is an important consideration here. I have clients who have exactly what Yelp was experiencing with some of their sites. They have less than 10% occupancy, and then I have other sites reporting 60% to 70% occupancy rates on peak days.
“So, the challenge here…is you really need to understand how those cohorts are working and how they desire to work. And if you have that sort of extreme of certain sites being very low occupancy and other sites being medium to high occupancy, you’ve got to figure out what is the right optimal mix, at scale, across your portfolio. So, there are smaller sites that can be relinquished, and we can use co-working for others. I’ve also seen the ‘new offsite is the new onsite’ approach, where remote and distributed talent is taking place and agnostic location talent approaches are taking place. …Companies are hiring talent outside of where they even have offices.
