Ownership of European offices: does remote working mean an evolution or a revolution?


Rigel Patricia Scheller (Staff Notes) | Restricting people to their homes to contain the Covid-19 pandemic has changed the way they shop, socialize, study and work. Some changes can be long term, with far-reaching implications for real estate. The severity of the impact on office buildings is less clear.

The impact of Covid-19 on office spaces could diverge significantly in different parts of Europe. While the repercussions in some countries may be limited due to trends in prepandemic teleworking, the impact could be stronger in countries with large office space under construction, higher vacancies and a lower prevalence of working from home before the onset of the pandemic.

Remote working will also have an uneven impact across building types: high-quality, modern and flexible premises whose owners can more easily adapt to new market demands will remain in demand – for three reasons.

First, the pandemic accelerated a pre-existing trend instead of creating a new trend more flexible work arrangements for white collar staff.

Second, in some cities and regions such as the Nordic countries, working from home was relatively common before the crisis. Consequently, any upheaval in the office real estate market will necessarily be less pronounced there than in places where the pandemic is leading to a more fundamental change in the way people work.

Third, there are potentially powerful forces that will limit or even offset the impact of remote working on office demand. Prestigious offices will remain important for the brand image of the company and as a meeting place with customers and business partners as was the case before Covid. Employers will also focus on improving the company’s work environment, possibly with a shift from personal and cellular spaces to a more collaborative space. As many employers will likely insist on a regular office presence for some and perhaps all employees, they will encourage it with more spacious work, meeting and common areas, especially to comply with health and safety measures. more stringent expected against coronaviruses. Employers will also continue to rely on smart, modern and comfortable offices to recruit and retain qualified staff.

In addition, the European office market was characterized by greater demand than supply before the outbreak of the pandemic. The tendency to work more from home could simply bring demand closer to supply in the medium term.

Remote work spreads unevenly before the Covid-19 crisis

Working from home is not a new phenomenon in Europe, but it was a slow-burning trend before the pandemic. In the EU, only around 5% of employees worked from home in 2010, a percentage that remained constant until 2019. However, the proportion of employees working at home at least once a week rose from 12.5% ​​in 2010 to more than 15% in 2019, according to Eurostat data, homework was much more pronounced in the Nordic region. More than 30% of employees worked from home for at least part of the week in Denmark, Norway and Sweden in 2019, according to Eurostat. On the other hand, rates were much lower in parts of Eastern Europe, at just 10% in Hungary and Poland, for example (Figure 2). The different industrial profiles of European countries partly explain the uneven prevalence of remote work, as not all tasks can realistically be performed remotely. The size of a country’s knowledge-intensive sector tends to determine the adoption of telework. In Sweden, a country with a well-developed information and communication technology (ICT) sector, more than 60% of ICT employees had the option of working from home in 2019, according to JRC calculations, work culture also plays a role. Flexible working has been entrenched in the Finnish labor market for more than two decades, based on a deeply rooted culture of mutual trust, a focus on family-friendly work policies and flatter hierarchies.

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A buoyant European office market before the crisis

The European office property market recorded record demand rates of over 12 million m2 in 2018 and 2019, with an office vacancy rate at a historically low level of 5.8% at the end of 2019. Robust demand and limited supply have put upward pressure on rents and pushed vacancy rates in some cities to unusually low levels. Vacancy rates were particularly low in Germany – Berlin 1.5%, Munich 2% – in Paris 1.6% and in the Nordic capitals. In Stockholm, the vacancy rate fell to 5.5%, 1.5 pp below the 2017 level. In Oslo, the vacancy rate fell to 5% in 2019, the lowest level since 2008. In Helsinki, the vacancy rate has declined from its peak of 13.5% in mid-2017 and was 11% at the end of 2019. Although high compared to other capitals , the construction pipeline for the next few years is slim, with only 42,000 m² of office space under construction.

Overall, The tight office market in Europe reflected years of sustained economic growth after the 2008-09 global financial crisis, leading to lower unemployment across Europe and a steady increase in economic activity in metropolitan areas.

Short-term impact of Covid-19: public health measures are wreaking havoc

The dramatic impact of measures to contain the Covid-19 pandemic has inevitably spilled over to work habits and the demand for offices in Europe and the rest of the world. First round of lockdowns allowed around 50% of the workforce in Europe to work from home2. Persistent restrictions have left offices in many countries empty. Rental negotiations have come to a halt as occupants have taken a wait-and-see approach to assess their long-term needs for office space if and when the pandemic is brought under control. Working from home is currently widely endorsed by governments as part of their coronavirus containment strategy. Uncertainty about the future of the office market has caused rental activity to drop 31% from the five-year Q1-Q3 average Рaccording to Savills. Northern Europe and some Central and Eastern European countries have again shown themselves to be relatively resilient. The biggest metropolises like Paris (the central business district rather than La D̩fense) and London suffered the most in terms of occupant demand (Figure 3), as authorities imposed strict lockdowns and other measures in March and April of last year. In the case of London, the office market faces not only the challenge of working remotely, but also stiff competition from flexible office providers and Brexit.

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Measures linked to the pandemic increased vacant spaces in European markets, reaching 6.3% in the third quarter of 2020 (0.5 pp more than in December 2019). The most important metropolises have again shown their resilience, with some core western European markets registering only modest increases in vacancy rates – Paris (+ 0.8%), Berlin (+ 0.9%) and Amsterdam (+ 0.2%) – despite the initial shock of the pandemic. This reflects the government’s massive support for businesses through vacation programs and state-guaranteed loans, among other measures. Other markets, however, saw larger increases in the quantity of vacant offices, which rose to over 11% in Warsaw (+3. 2pp), 8.1% in Budapest (+ 1.9pp) and to 7 , 8% in Stockolm (+ 2.3pp).

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The uncertainty combined with the use of shorter standard leases in some countries partly explain the differences in subscription and vacancy rates between cities. For example, leasing terms in the London office market are relatively long – 10 years on average – compared to 3 to 5 years in most countries of continental Europe. This could partly explain the drastic drop in underwriting rates in London, with some tenants preferring not to commit to such long periods, favoring flexible office providers and their short-term lease offer during such a period of uncertainty. . Another factor influencing these variations is the development pipeline, which is more dynamic in Central and Eastern Europe. This has led to newly constructed buildings coming onto the market at the same time as owners put older space back on the market in response to last year’s recession.

You can read the full report at: https://www.scoperatings.com/ScopeRatingsApi/api/downloadstudy?id=a97431b1-3fa6-4e3e-a87a-2c01c662c42e


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