13 November 2020
A personal view of the evolving role of real estate in a world of technological, social and business change, by Richard Pickering, Chief Strategy Officer, UK.
Locked down and locked in
The present abnormal use (or lack of use) of commercial real estate will blow out with the same wind as coronavirus. Hopefully that will be during the course of 2021. However, in the next 14 months, new behaviours are being forged in the crucible of intermittent lockdowns that might have much more enduring impact. They say it takes 21 days to form a habit. We’ve had more than 230 days of living abnormally, with the strong prospect of at least that to come. Will the length of this period be the biggest determinant of whether normality returns or something new takes its place?
I see a lot of people conflating the short-term position on ‘returning to the office’ (sometimes described with Freudian slip as ‘returning to work’) with the longer-term position of ‘the future of the office’. That’s a mistake. The two are based on completely different drivers. In the short term, the reasons that people aren’t returning to the office are, firstly, due to enforced conditions (government or corporate), and secondly due to health concerns (both real and imagined). Whilst the virus continues to circulate, and whilst as a consequence being in an office or a shop remains for many a stressful or unpleasant experience, people will continue to vote with their virtual feet.
In the medium term, both of these reasons will disappear, and hence, without cause for an alternative, things will go back to exactly how they were in 2019. You don’t think so? The manifestation of an alternative relies on two things: (1) the desire for an alternative, and (2) the efficacy of the alternative solution. These factors, rather than health concerns or social restrictions, inform the future of the office. Without wishing to fuel what has become a divisive discussion, modern communications technology has created an efficacious solution to both working and shopping remotely. Anyone saying otherwise is being disingenuous or promoting an agenda. The more salient question is whether people and businesses prefer this solution. Again, division is the order of the day. It turns out that the world is split on whether they prefer the old or the perhaps temporary new. Some are desperate to get back to how things were. Others have tasted a new normal that they don’t want to relinquish. What is likely to change by the end of 2021 is that the latter will inherit a driving seat in which they never believed they would sit.
The default assumption prior to coronavirus was that if you perform clerical work, you do so in an office. The pendulum is mid-swing. If people sit at home for most of next year, the default assumption will be that this is where they work. The inertia will shift to home working, and the burden of effort will be on employers (if so minded) to encourage people back to the office rather than vice versa.
Many say that coronavirus has accelerated change that would have happened anyway. I’m not so sure. There is huge inertia to the status quo, and those most motivated to maintain it tend to be the powerful alphas that dominate corporate decision making. I have significant doubts whether we would ever have crossed the Rubicon; there were too many systemic barriers. The freak circumstances of the past year pushed us past a natural line. Managers didn’t need to learn to trust their staff to work remotely; they were forced to do so. Silver shoppers didn’t need want to shop online; it was the only risk-free way to get food.
Nevertheless, with the line now crossed, the questions that we should be asking ourselves are: (a) having tasted it, do a material number of people want this change?, and (b) by the end of 2021 will the change be locked in, such that the inertia shifts to the new normal rather than the old one?
The answer to the first question appears to be yes, at least so far as the office is concerned. Various recent surveys suggest that 70-80% of people want to work from home more often in the future. Let’s be clear – ‘more often than in 2019’ - not ‘permanently’ (which is <20%). Flipping the lens, of those currently working entirely from home due to the short-term conditions listed above, the large majority therefore want to work more in the office going forward than they are at the moment.
…which leads us to the second question. Will current behaviours be locked in by the end of 2021? The answer lies in the extent to which switching costs have been incurred in areas of: (1) capital adaption, (2) financial adaption, and (3) behavioural adaption.
By ‘capital adaption’, I mean that extent to which capital projects create a vesting in the new normal. These could be investments (e.g. committing to new low-density office accommodation), disinvestments (e.g. a sandwich chain exiting multiple premises) or reallocative (e.g. a pension fund moving its focus away from types of commercial property).
By ‘financial adaption’, I mean both consumers and businesses budgeting on the basis of a newer lower cost solution. For workers, this might mean banking the savings that arise from commuting less frequently, perhaps to recoup a fall in salary. For businesses this might mean developing an operating model that uses less real estate and therefore incurs less rent.
By ‘behavioural adaption’, I mean a change in the way that people do things – the forming of new habits. This is a much more complex subject, that is influenced by several factors. These include self-efficacy (e.g. my mum’s proven success in ordering her groceries online means she is more likely to do so in the future), and societal pressures (e.g. the push-pull of wanting to be visible in the office to preserve your job vs your partner asking you to spend more time at home with your family).
In the context of health issues (e.g. stopping smoking), research finds that these changes are most likely to be embedded if there is: a disruption to normal behaviour (e.g. lockdown), a sense of reduction in choice (a need to do things a certain way), and a self-identity shift (e.g. ‘I value a work-life balance’). In the context of economic downturns, a study by the University of California found that those aged 18-25 when recession hit were more likely to carry certain beliefs for life than other age groups (e.g. luck over hard work drives success, high taxation required, lack of faith in government).
For behavioural adaptions to become societal shifts, there needs to be wide-scale adoption. This tends to rely on visibility. Studies show that if people see evidence of norms altering in others, they are more willing to make the shift themselves. We live in the most visible society in history, which might mean that shifts happen more quickly than in previous generations. We see this in other recent major societal shifts, for instance The Arab Spring, which was fuelled by social media and collectivism and spread rapidly. Right now, workers across the world will be looking at the kind of policies offered by competitor firms and seeing how theirs shape up, in a way that simply was not possible 20 years ago.
Over history we observe both failed and successful societal change; usually in response to a perceived injustice or a fight for rights. The Bolshevik revolution is one of the most notable societal changes in the past 100 years. The liberal shift in the 1960s has been similarly generation defining. More recently, the Occupy movement born out of the financial crisis started with fanfare but ultimately fizzled out to nothing. The jury is out on whether the present Black Lives Matters and Extinction Rebellion movements deliver any lasting societal change.
Common to all of these causes was a rallying cry and an organised pressure group. Whereas the right to work flexibly would undoubtable be a win for workers, it is difficult to conceive what group would champion this – the trade unions don’t speak for the majority of professional employees. It therefore feels that for change to materialise it would have to be supported by a significant number of employers as part of their talent agenda. This remains to be seen. I’m reminded of Marissa Mayer’s 2013 edict for Yahoo workers to return to the office after years working remotely. Ultimately, a desire to keep one’s job is likely to be persuasive in breaking a habit, no matter how long it has been formed.
What will happen in 2021? Perhaps there will be a vaccine, perhaps there won’t. Perhaps people will return to the office, perhaps they won’t. The smarter questions focus on what adaptions business and people will make over the coming year that set them on a new path for the future. The longer that lockdown conditions persist, the more likely it feels both that adaptions will be made, and that these adaptions will become permanent. Watch out for irreversible allocations of capital and budgeting changes, but also keep a weather eye on the invisible undercurrent of behavioural change. Business cannot put their fingers in the dam of major societal changes and expect that approach to work; even autocratic governments succumb to people power in the end. However, a few lines still need to be crossed if our interim normal is to bed in.
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