The last decade has brought substantial secular changes that have upended office markets across the world: the digital economy has grown at an extraordinary pace; the financial crisis caused an employment shakeout; and employers have stepped-up the pressure to maximise efficiency and lower workspace costs.
These developments have combined to change where and what sort of workplaces we work in. They will likely continue play a fundamental role in re-shaping the market for office real estate. But perhaps the most important influence has come from changing demographics: millennials have rapidly emerged as the most significant age group in the labour force, shaping the type and location of the modern workplace.
The millennial’s choice: how, when and where to work
In most developed markets, millennials – the generation aged between 20 and 37 – account for about a quarter of the adult population. They will make up the largest share of the workforce by 2020 in North America and Europe. How, when and where they work are crucial considerations for them. So employers are especially sensitive to their needs, particularly the more highly educated and skilled workers.
For them, the format of their workspace and the location matter in choosing their employer. Their preference has increasingly been for flexible, adaptable space in urban locations. US survey research from Cushman and Wakefield (2016) showed that two-thirds of millennials in the US wanted to live and work in urban areas. Likewise, research from Deloitte’s 2017 Annual Millennial survey showed the majority enjoyed some flexible working and believed flexible working arrangements supported greater productivity and employee engagement.
Exhibit 1: “Flexible arrangements are not simply nice to have, but are strongly linked to improved performance and employee retention”
Source: Freelance flexibility with full-time stability, The Deloitte Millennial Survey 2017
Flex jobs and sharing help revive demand
The importance of millennials in shaping office preferences dovetails with emergence of the digital economy and the tech revolution, which have transformed many aspects of modern working life. That includes office life as much as shopping. The trials of the retail sector have been well-documented. Online retailing has eaten into the profitability of bricks-and-mortar landlords. The spread of workplace automation has impacted the use of space, although more recently, developments such as the growth in co-working – independent professionals sharing a workplace – have so far had a more benign effect on landlords, particularly in major urban locations.
Indeed in the last couple of years, the office sector has enjoyed a minor renaissance in many major European markets. Amsterdam, for example, has seen a sharp drop in the vacancy rate resulting from rising demand for more flexible, shared office space. In addition, take-up has benefited from a resurgent Dutch economy driving jobs growth as well as a movement of jobs to more desirable urban locations in and around the capital, a trend that mirrors developments in many other office markets.
Exhibit 2: Office market take-up and vacancy in Amsterdam since 2007
Note: Take-up for 2018 is not available. Source: Jones Lang LaSalle (JLL), as of May 2018
More than a desk and chair
The emergence of the so-called gig economy and “new ways of working” have forced landlords to re-evaluate how they use workspace. Today’s office worker demands workplaces that inspire and assist, rather than depress and hinder, as 21st century functions geared to an increasingly digital economy have replaced the administrative, secretarial and accounting-type office jobs of previous generations.
Exhibit 3: Open-plan spaces dominated 20th century offices, but are now becoming architectural anachronisms
Source: Hudson Pacific Properties
A spreading trend
Co-working in serviced or shared office spaces has emerged in part to service the greater need for flexibility. Serviced offices have been around for more than 20 years. Companies such as WeWork and other international providers have made a considerable impact on office markets in major cities across the world in the last decade. Within Europe, growth has been particularly evident in London, but it is now starting to spread to other major cities.
Demand from shared-office, co-working organisations saw flexible office space in Europe grow by around 30% in 2017 alone, according to JLL. Like other European markets, the Netherlands has benefited, with flexible office space accounting for 5%-10% of office take-up in Amsterdam in the last few years. London is the most mature market in Europe: flexible office space operators accounted for just over 20% of total take-up in 2017.
The frontrunners: US landlords
How can investors be part of the changing landscape? In the global listed REITs sector, 49 companies are classified as pure office landlords – roughly 12% of the global universe by market capitalisation – although large numbers of companies with diversified portfolios also have significant office portfolios. The US has the largest office presence in the REIT sector, with Europe the smallest, only 7% of companies are classified as office landlords.
Office REIT landlords, typically operating in the strongest locations with access to capital and possessing the local footprint and scale to take advantage of changing demand, have been well-placed to meet the need for more flexible and shared spaces. Companies in the US have been in the vanguard.
Office companies in the developed global real estate investment universe
The office as a place of work is undergoing a rigorous transformation in the form of explosive growth of co-working and more flexible work patterns. In the public markets, investors have driven landlords to respond to these changing requirements, making sure that they can meet the modern workers’ desire to work in smart buildings in attractive urban settings and reap the benefits of these trends. Landlords that do not have the capital, scale and skills to meet these needs risk being left behind by the revolution taking shape in the workplace.
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