Covid-19 force landlords to rethink business models

The Covid-19 pandemic served as wake-up call for landlords with large office properties, pressing them to rethink their business models.

This comes as more than 80% of Singapore workforce telecommute today, culling current office space demand, “with knock-on effects for building management, mass transport and F&B in the vicinity,” said Professor Sing Tien Foo, Head of the Department of Real Estate and Director of the Institute of Real Estate and Urban Studies at the National University of Singapore, in a commentary posted at CNA.

The Ministry of Health recently said that firms should continue to allow employees to work from home where possible, even as the city-state prepares to reopen the economy and allow the reopening of workplaces provided strict rules are complied with.

However, Sing noted that that there are opposing factors shaping on whether remote working will displace the need for large office spaces.

“On the one hand, working in the same physical location offers opportunities for face-to-face interactions and business collaboration, which have been cited as vital ingredients for creativity and innovation,” he said.

Moreover, longstanding corporate practices may not be easily undone.

“On the other hand, the advent of the Internet, the smartphone and social media have demonstrated how technological changes can have an irreversible and permanent impact on workplaces.”

Aside from rental cost savings for firms, proponents of remote working point to productivity boost, deep focus as well as time-savings since office workers no longer have to commute daily.

“After incurring sunk costs in retooling businesses that enable that telecommuting reality, and as habits surrounding remote working deepen, telecommuting may become the new normal, putting downward pressure on commercial real estate space needs in the long run,” said Sing.

After the lifting of the circuit breaker, some companies may reduce their footprint in the Central Business District (CBD) as part of business continuity plans to lower a high workforce concentration within one location and turn elsewhere for branch offices – accelerating a trend already underway.

In fact, financial institutions and banks have already moved non-essential backroom operations away from the CBD, with the Changi Business Park emerging as a popular choice.

Cisco and Google moved into Mapletree Business City II, while oil giant Shell relocated to The Metropolis at Buona Vista.

Even government agencies, such as the Building and Construction Authority (BCA and The Agri-Food and Veterinary Authority (AVA) moved away from downtown and relocated to JEM.

In the event firms adjust their office space requirements after the virus outbreak blows over, landlords would be pressed to act. This may lead to CBD’s transformation from a single-use district that is dominated by office use to a mixed-use district, said Sing.

“When firms shrink their real estate space in CBD, landlords of old buildings will finally be nudged to pull them down and put up new developments, in line with the URA Master Plan that projects a shift away from office and commercial spaces towards residential and mixed-use in that downtown core.”

On co-working spaces, Sing does not share the view of most commentators that Covid-19 may kill the co-working space industry.

This is because he expects some companies to leverage co-working spaces for more flexible lease tenures and space planning once the dust has settled post-Covid-19.

With this, he sees co-working firms shifting towards a combination of dedicated spaces and private offices in lieu of the large, open-plan places that they are known for.

“Meanwhile, landlords of office buildings, such as Guoco Midtown, may shift the rigid leasing model that locks tenants into a fixed space over a long lease term to one that offers flexible lease tenure and adaptable space,” added Sing.

Source: 21 May 2020, CommercialGuru