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A recent survey showed companies are adapting their property portfolios to shifts in working patterns, highlighting the significant changes expected to transform the commercial real estate market.
A Knight Frank poll of 350 leaders at international firms found that half of the biggest companies surveyed — those with more than 50,000 staff — expect to cut down their global portfolios, with most expecting a reduction by between 10 per cent and 20 per cent.
Conversely, smaller businesses or those with fewer than 10,000 employees said they expect to grow their office space, with 55 percent stating their office footprint would expand, the survey data show.
“Better but less space is probably the strap line for the larger organisations,” Lee Elliott, a commercial real estate expert at Knight Frank said.
The expert noted companies had put real estate decisions on the backburner in the past three years, waiting to assess post-pandemic working habits, with many still counting the days for their leases to expire before making changes.
He said while there have been “lots of people talking” about making shifts in their workplace set-up, the global real estate firm “haven’t seen a lot of evidence of it”.
"I think we are now at that tipping point. Change in the occupier market is a 3–6 year play, not a 3–6 month play,” he commented.
Mr Elliot highlighted the shift in priorities among corporate real estate leaders is not the “death knell of property markets”, noting that the shortfall of supply will lead to an increase in rents — particularly for prime buildings.
“Now that we are in a truly post-pandemic world, corporate decision-makers are ‘removing the blinkers’ and making clear decisions around their future corporate real estate strategy based on a broader array of business issues than just the pandemic,” he stated.
A previous report from CBRE showed premium office spaces are experiencing a surge in demand in the post-pandemic world, with corporate leaders shifting their office spaces towards high rent, high-quality buildings due to the rise of hybrid working.
According to Knight Frank, nearly half or 47 per cent of the companies surveyed are also planning to change their headquarters in the next three years — an increase from the 40 per cent in the 2021 edition of the report.
A closer look at the survey results showed the top driver is the potential for cost savings, with approximately 47 per cent of respondents planning to relocate their core office facilities cited cost savings as their primary motivation.
Beyond cost savings, other factors that are motivating companies to uproot their headquarters include change of workstyle influencing quality of space required (38 per cent), change of workstyle influencing the quantum of space required (37 per cent), business transformation (30 per cent), and business restructuring (29 per cent).
Companies looking to close ESG gap
But the report noted the mismatch between the existing workplace and its future purpose or functional obsolescence is only one part of the decision-making equation.
“Amid tightening regulation and more developed and ambitious corporate strategies, ESG considerations extend the challenges of physical obsolescence and are upending supply dynamics across global office markets,” the report stated.
The survey highlighted the increasing alignment between strategic business issues and the real estate sector.
Notably, environmental, social, and governance (ESG) ranked sixth among the top issues, with almost 20 per cent of respondents identifying it as a priority.
This marks a substantial increase from just over half of respondents in the previous survey conducted in 2021.
The influence of ESG factors is particularly evident among large organisations participating in the survey, reflecting heightened scrutiny on big businesses from investors, staff, and regulators.
This pressure to close the gap in ESG commitments has been observed as early as 2022.
Global real estate firm JLL’s survey of 1,000 corporate leaders last year showed 83 per cent of firms in the Asia-Pacific region now see sustainability as a “board-level agenda”, while eight in 10 companies say their employees expect their workplaces to have a positive impact on the environment.
Knight Frank’s findings showed an uptick in this trend, stating “greater intent is also seen in data highlighting the proportion of respondents’ future real estate portfolios that will carry a sustainability accreditation”.
Around half or 46 per cent of the respondents expect a quarter or more of their future portfolio to be accredited, a notable improvement compared to the current situation, where only 25 per cent of respondents have such accreditations in place.
While Knight Frank noted the figures are “disappointing”, there is still tangible progress being made.
“This finding again points to a closing gap between ambition and action and growing momentum on ESG. However, the climate crisis’ severity is such that the cadence will need to increase further,” it stated.
Looking forward, the firm forecasts “significant restructuring of corporate real estate portfolios will characterise the next cycle”.
“CRE leaders will need to strike a careful balance between supporting strategic intent, avoiding operational risk and delivering strategies and solutions that are financially efficient. That is quite a balancing act.
“But the resilience and performance of the underlying business ultimately depend upon achieving it and managing the complexity,” it stated.
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